Private credit - the largely unregulated market that provides bespoke loans to mid-sized companies - is showing increasingly visible strains as investors press for withdrawals and lenders contend with compressed returns and higher financing costs.
Concerns have been growing since mid-2023 and accelerated in recent months as redemption requests at some publicly listed private credit vehicles, known as business development companies (BDCs), reached historic levels. Blue Owl Capital disclosed it had received an unusually high volume of withdrawal demands this week and has invoked limits on redemptions, an action the firm is permitted to take. Several other major firms in the space have taken similar steps, including Ares Management, Apollo Global, Blackstone, KKR and private-credit operations at large banks such as Morgan Stanley, J.P. Morgan and Goldman Sachs.
Leaders at many of these firms have described the spike in outflows as part of a necessary market adjustment rather than the start of a systemic collapse. Even so, new stress indicators are emerging. BDCs have faced rising costs on bank borrowings at the same time the double-digit returns that once defined private lending are beginning to compress.
"You’re going to have credit cycles, you’re going to have losses, you’re going to have some markdowns. I mean, they’re not lending at 5% for a reason, right?" said John Giordano, managing director at Seaport Global Holdings in New York. Giordano argued the risks are unlikely to be systemic, pointing to the generally low leverage employed by many BDCs, their holdings of senior debt or equity stakes that grant them management influence, and the relatively strong capitalisation of the banking sector.
Nonetheless, a distinct set of concerns has crystallised around technology-enabled disruption, specifically the possible impact of artificial intelligence on companies financed by private lenders. Private credit expanded significantly after the 2008 financial crisis as an alternative to bank financing, providing long-term, covenant-light loans to private equity sponsors seeking to acquire medium-sized businesses. Detailed data on exposures, valuations and losses inside private credit portfolios remain limited because many of the deals are negotiated privately. Collectively, BDCs hold more than half a trillion dollars of private assets, though the broader private credit industry is far larger. The Alternative Investment Management Association estimates the sector at about $3.5 trillion.
Market valuations have already reflected some of this caution. Shares of several publicly listed BDCs have tumbled sharply this year and, on average, are trading at about a 20% discount to their reported net asset values. The weakness has not been limited to private credit firms: shares of U.S. software services companies - the sector most directly connected to private credit financing - have slid roughly one-fifth this year.
Portfolio managers and strategists describe a feedback loop that could amplify problems. Rory Dowie, an equity portfolio manager at Marlborough in London, said his firm has reduced positions in some asset managers and even sold holdings in Swiss firm Partners Group after comments from the firm's chair, Steffen Meister, warning that default rates in private credit might double in the coming years because of AI-driven economic dislocation.
"It’s hard to say what’s going to crack first... and it becomes a self-fulfilling prophecy whereby you could get a bigger, more systemic issue occurring," Dowie said, highlighting the interdependence between public markets and private credit funding channels for AI-related businesses.
Some economists and strategists see the sector as entering the early stages of a rolling crisis. Javier Corominas, director of global macro strategy at Oxford Economics, noted recent estimates suggesting that 25% to 35% of private credit portfolios face meaningful exposure to AI disruption risk. That, he said, places the market in a discovery phase: weaknesses are known to exist but have not yet fully surfaced across all portfolios.
"We are still at the beginning of discovering the issues and it might not happen tomorrow, it might happen in three months or six months," said Alberto Gallo, chief investment officer at Andromeda Capital Management in London. He used a metaphor to describe latent credit deterioration: "You have this box where you have 100 companies, but you know that 10 of them are dead cats. Until you open the box, they are still alive. That’s basically what they have created."
Beyond BDCs and asset managers, a central concern is how losses in private credit would be absorbed by insurance companies and retirement investors. Corominas emphasised that direct bank lending to BDCs is modest and manageable; the larger vulnerability lies in the growth of private credit exposures among life insurers and annuity providers. Such holdings have more than doubled over the past decade.
Private credit now represents roughly 35% of total investments held by U.S. insurers and about one-quarter of assets at U.K. insurers, according to the estimates cited by Corominas. He also noted that insurers affiliated with private equity firms have amassed an estimated $1 trillion in assets via those relationships, concentrating further exposure to private credit loss.
Corominas warned that the contagion mechanism from private credit losses would differ from the 2008 bank-run dynamic. Rather than a sudden liquidity squeeze, the transmission could be a slow degradation of insurer balance sheets and retirement security, he argued: "Should private credit losses erode insurer solvency, the resulting contagion would not resemble the bank-run dynamics of 2008, but would instead manifest as a slow, grinding erosion of retirement security - harder to detect in real time, and significantly more difficult to reverse."
Gallo echoed the view that private credit presents a distinct form of systemic risk. He cautioned against treating the current dislocation as equivalent to the subprime mortgage crisis, which was propelled by housing leverage and collateralised debt obligations distributed through banks. In contrast, he said, private credit’s main contagion channel runs through insurance companies that typically do not mark assets to market and that can amplify leverage in later stages of the cycle.
"This is a different animal with different contagion channels," Gallo said. "In the subprime crisis, contagion was through banks, and there was proper valuation of assets, but this time it is through insurance companies with no mark-to-market and more default risk. Regulators always fight the last crisis, and here you have the opposite, the mirror image of the last crisis."
Market participants also noted that algorithmic stock-picking tools and data-driven investment analyses have been applied to evaluate the attractiveness of bank and asset-manager stocks in this environment. One such automated evaluation referenced Goldman Sachs, comparing the firm with thousands of others across more than 100 financial metrics and flagging past winners identified by the tool, including Super Micro Computer and AppLovin. Those companies were cited in the evaluation with historical performance figures, but market participants cautioned that algorithmic signals are one input among many in assessing exposure to private credit stress.
For now, most major managers say they have the contractual tools and capital buffers to withstand redemption pressure and credit-cycle losses. But the mix of concentrated insurer holdings, opaque private valuations and potential AI-driven disruption leaves a question mark over how smoothly the sector will recalibrate without broader consequences for savers and pensioners.
Key takeaways
- Redemption requests at publicly listed private credit vehicles have surged, forcing some firms to limit withdrawals and prompting manager-level recalibration.
- Rising bank borrowing costs and shrinking private-lending returns are stressing BDCs, while AI-related disruption poses a material risk to a subset of portfolio companies.
- Large private credit holdings by insurance companies and affiliated insurers create a distinct contagion channel that could gradually erode retirement security if losses materialise.
Impacted sectors - private credit and BDCs, technology/software services, insurance and pension-linked investments.
Risks and uncertainties
- AI disruption risk - Analysts estimate 25%-35% of private credit portfolios face potential disruption from AI, which could translate into higher defaults among financed companies.
- Insurance sector vulnerability - Private credit represents around 35% of U.S. insurer investments and about one-quarter of U.K. insurer assets, with insurers affiliated to private equity holding an estimated $1 trillion via those relationships.
- Liquidity and valuation opacity - Historic levels of redemption demands and limited public mark-to-market reporting on private assets could conceal losses until pressures force broader repricing.