May 11, 2026, 1:21 PM ETInterview, Other

Cracks in Private Credit

The private credit market reached approximately $2 trillion in assets under management (AUM) after rapid expansion following 2011.
Direct lending emerged as non-bank lenders filled a lending void created by post-Global Financial Crisis bank regulations and capital constraints.
The sector transitioned from a "gold rush" characterized by high interest rates and strict safety requirements to a competitive environment where lender advantages were arbitraged away by excess capital.
The addressable borrower base has expanded from small, unbankable companies to include entities capable of accessing public debt markets who choose to refinance into private credit.
The financing ecosystem now functions as an integrated continuum involving bank lending, public debt markets (syndicated, high-yield, leveraged loans), and private direct lending.

Recent pressure on the asset class stems largely from redemption requests targeting non-traded or evergreen Business Development Companies (BDCs).
Non-traded BDCs represent roughly 15% of traditional private credit AUM, while retail access to the broader private credit universe is significantly smaller.
Institutional capital, comprising the vast majority of AUM, remains locked in drawdown funds, insulating the core market from immediate liquidity shocks.
Structures include a 5% per quarter (20% per year) redemption limit designed to prevent forced asset liquidation at depressed prices during redemption windows.
Industry experts argue redemption gates are structural features, not flaws, utilizing a 90-day window and liquid securities holdings to meet obligations without fire sales.
Projected quarterly loan sales required to meet maximum redemption limits (approx. $5 billion) represent a fraction (roughly 6%) of the $85 billion quarterly volume in the syndicated loan market.

Realized losses tracked through year-end 2025 remain below historical averages and are in line with public high-yield and leveraged loan markets.
Payment-in-Kind (PIK) activity has stabilized at 7–8% of overall income for BDCs, down from previous peaks, with no significant deterioration in trends.
Non-accrual rates have remained within a tight range over recent quarters, indicating controlled directional deterioration despite a Fed rate-hiking cycle.
Leverage ratios for BDCs are capped at a 2-to-1 debt-to-equity ratio, with many funds operating at levels lower than simple banking leverage metrics.
The market is not currently entering a systemic credit crisis, though individual manager underperformance due to poor due diligence or sector concentration is expected.

Private credit portfolios hold a disproportionately high exposure to software companies compared to high-yield and syndicated loan markets.
Investors worry about potential double-digit defaults in the software sector driven by AI disruption, arguing that senior lenders lack the upside potential of equity investors to offset total losses.
Howard Marks counters that widespread software failure would require value destruction sufficient to wipe out equity, junior lenders, and mezzanine capital before impacting first-lien private credit investors.
Even in a catastrophic scenario where the software sector loses five-sixths of its value, a diversified private credit fund with 25% exposure would lose approximately 12.5% of capital, avoiding total insolvency.
Marks asserts that while specific fund returns may suffer, this exposure does not pose a threat to the broader U.S. financial system.

Michael Arrighetti forecasts that current stresses will shift market share toward opportunistic credit, direct lending funds, and secondary markets rather than stalling overall industry growth.
Growth in the non-traded BDC sector is expected to slow due to investor scrutiny, while capital is reallocated to other private credit vehicles.
Howard Marks predicts that direct lending demand will decelerate as the private equity industry's growth rate naturally declines.
The market is undergoing a necessary credit cycle correction where the "tide goes out" to expose errors, potentially leading to overcorrection and tighter credit availability.
A full credit cycle is anticipated to result in a healthier, more circumspect investment environment where buyers better understand liquidity limitations and contractual terms.
Industry observers expect a reallocation cycle similar to the post-2020 real estate correction, where capital eventually returns to private credit after structural performance is re-evaluated.