Private Credit Is Cracking: What This Means for Investors

What is the Private Credit market trying to tell us?

A new market risk is said to be floating around, lingering in the shadows of the banking system that few bothered to look closely at. That danger is “private credit”. 

But what exactly is private credit, and why is the sector posing such a big risk to the global financial system?

According to Deutsche Bank’s primer on the topic:

Private credit is non-bank lending typically to middle market companies which typically range in size from US$25m to US$75m in EBITDA. These companies can either be sponsored, or owned by a private equity firm, or non-sponsored. They are also often unrated companies, although a credit assessment, or point-in-time rating of the company will often be done in conjunction with financing.

In summary, private credit entails three not-so-usual lending characteristics: “non-bank”, “sponsored”, and “unrated companies”.

Despite these different lending terms, investors flocked to the sector en masse. Assets in the area exceeded $1.5 trillion (end 2024).

Why is the private credit market so popular with investors?

For a few reasons. The first is low correlation with public asset markets such as stocks. The other attraction is the reasonably high income (and fees) to compensate for the liquidity premium. When interest rates hit zero in the years before and after the pandemic (via ZIRP policies), these income streams were highly sought after.

Source: (scale in millions) db.com (2024)

The other attraction was the historically low default rates of these private borrowers. In the era of cheap debt, many were able to roll over their borrowings easily, sometimes with even lower costs than before. Few commercial entities actually defaulted. Broadly speaking, investors assume they could extract higher returns with lower risks.

The chart below tracks this seemingly benign credit trend since 2018.

Source: Financial Times (2026, paywall)

Underpriced credit risk

But why are some astute institutional investors worried about the private credit market now?

Private credit, despite its innocent sounding name, is essentially debt. The same old debt that got many over-leveraged players into financial troubles. 

At its core, debt is simply a contractual agreement that stipulates servicing (of interest) and repayment (of capital). When a borrower can no longer do either, they are simply financially insolvent. Lenders stand to lose a large chunk of their capital when borrowers default.

First Brands and Tricolour were two commercial groups that went bust last year after failing to repay their debt. These days, many investors are slowly realising that more-than-expected private credit borrowers will be unable to service their debt due to mounting cash flow problems.

According to the chair of Partners Group, Stephen Meister, he predicted that “there’s a good chance that we see default rates double in the next few years.”

Recent developments unnerving investors

In finance, contagion spreads easily. That’s the worry. A few other credit funds are, too, sounding the alarm, especially when:

• wealthy retail investors are starting to rush out of the private credit sector (via redemptions, $10 billion alone in 1Q)
• investment firms/sponsors start “gating” the funds (restricting redemptions because it would swiftly collapse the portfolio) Morgan Stanley/Blackrock recently gated funds
• investors worry further and rush to sell more debt, further depressing the value of private credit portfolios

On a macro level, imagine the scenario where the Federal Reserve is forced to hike interest rates due to $100 crude oil (currently at $95 this fine Tuesday morning). Debt prices would plunge further, as interest rates and debt prices move inversely.

Another point worth mentioning is that private credit has lent a significant amount to the software industry. According to JP Morgan, around a fifth of private credit went to SAAS companies (software-as-a-service). And the SAAS sector has been hammered in recent quarters due to the AI disruption. The financial credibility of the sector appears to be falling.

In other words, there is plenty of credit risk in private credit that is not sufficiently priced in. But whether it is like the start of a 2008-style credit crisis remains an open question.

Charts of Private Credit Funds

Who, you wonder, are the largest players in the private credit market? A few famous financial names, like Blackstone, Goldman, BlackRock, Apollo and Blue Owl. 

Below, I go through the charts of these fund managers, where you can assess for yourself the market’s reaction to the private credit sector.

Source: privatedebtinvestor.com/pdi-200/

Ares Management (ARES) – prices have halved over the past year. Its recent decline touched 2-year lows, suggesting a multi-week toppy chart formation. Oversold, a rebound off the psychological round number $100 is possible. But it would take a number of sustained positive factors to propel prices back to its 2024 highs.

Blackstone (BX) – lost a third of its value since the start of 2026. Prices are now trading near its 2.5 year lows. Like ARES, Blackstone is potentially finding support at the round number level at $100. A temporary rebound from here is possible, to the overhead resistance at $120. (BX bought HPS last year.)

Apollo (APO) – is probing massive support at $100. If this fails, it could spark another leg down since there is no technical support until $80. But like others, APO’s current decline is oversold and could be due to a bounce (to $120).

Carlyle Group (CG) – slipped beneath its $50 support recently. Unlike BX or ARES, Carlyle touched new highs last year and was trading near these highs in January. It was a sector outperformer. Still, having lost a third of its market value since December, investors would not be impressed with this relative performance. Next support is estimated near $40-44.

Blue Owl Capital (BWO) – by far the weakest stock chart in the sector. It’s share price has lost 65 percent of its value in a year, and is flirting with record lows. Despite dropping 50 percent since January, another halving is possible since there is no support underneath.

TPG (TPG) – is another PE stock showing a weak price trend. Prices went sub-$40 recently, which may lead to further momentum selling.

So what should investors do?

Investors are clearly worried about the sector. Many “sponsors” of the private credit funds have seen a large drop in their share prices due to a gradual deterioration of the credit cycle.

Will this impact the entire financial market (a la GFC)? That’s the debate.

One, how bad will the default rate go? Predictions vary.

Two, who will be affected? Nobody knows for sure. A deep dive into lenders’ loan books/funds is required; but few are willing to share this critical info. Investors can only guess from the outside.

Three, can financial groups withstand this private credit shock? Many say yes, since equity ratios are higher these days, thus providing a thicker capital cushion.

Still, many financial crises started from a benign outlook that turned out to be anything but.

A sense of vigilance must be kept, especially when geopolitical events are moving at pace.