What Is Driving the Stress in Private Credit

Private credit used to feel like that quiet corner of the market where deals got done without the noise. Now it feels more like a packed conference room where everyone showed up at once, and someone just asked a tough question nobody wants to answer. That shift didn’t happen overnight. It built slowly, then all at once.

How did private credit go from niche to everywhere?

Step back a bit. Before 2008, if a company needed serious financing, banks led the conversation. Syndicated loans, high-yield bonds, that was the playbook. Then the Global Financial Crisis hit, regulators tightened the screws, and banks pulled back from riskier lending. Nature hates a vacuum. Private capital stepped in. Over the next 15 years, private credit evolved from a workaround into a core funding channel. Direct lending took off, especially for private equity-backed companies. Instead of going through a long syndication process, borrowers could sit across the table from a handful of lenders, hammer out terms, and close faster. Less disclosure, fewer counterparties, more flexibility.

Investors loved it too. Yields often landed in the high single digits or low double digits, a nice upgrade from traditional bonds. Add in the perception of lower volatility, since these loans don’t trade daily, and it looked like a pretty clean story. The numbers tell it straight. Private credit has grown from roughly $150 billion two decades ago to somewhere between $2 trillion and $3 trillion today. That’s not a side market anymore. That’s a system. And like any system that grows fast, it eventually runs into friction.

Are redemption limits the new wait 

Many private credit funds, especially those marketed to individual investors, offer periodic liquidity. Quarterly redemptions became the norm. Sounds reasonable on paper. But the underlying loans are anything but liquid. These are private deals with three to seven-year horizons, often tied to mid-market companies. You can’t just flip them like a Treasury bond. So, when investors started asking for their money back in larger numbers, funds had a choice: sell assets at a discount or limit withdrawals. Most chose the latter.

BlackRock capped withdrawals in one of its lending funds after requests exceeded limits. Blackstone’s BCRED saw record redemption activity, around 7.9%. Blue Owl and others faced similar pressure. For many investors, this was the first real test of something they hadn’t fully stress-tested in their heads. You can request liquidity, but you might not get it when you want it. That gap between expectation and reality tends to make people sit up straight. And once that happens, questions start flying.

Is loan quality quietly getting messy?

Liquidity concerns grabbed headlines, but the bigger issue sits underneath, credit quality. We’re starting to see cracks. Not a collapse, but enough movement to matter. Default rates in U.S. private credit have edged up to about 5.8 percent. Shadow defaults, situations where loans get reworked before formal default, have jumped more sharply, from roughly 2.5% to 6.4% in a year. Then there’s the rise of PIK, payment-in-kind interest. Instead of paying cash, borrowers add interest to the loan balance. It works fine in the short term, but it’s a signal. If cash isn’t there today, what does that say about tomorrow?

At the same time, around 40% of private credit borrowers now show negative free cash flow, compared to about 25 percent in 2021. This isn’t catastrophic, but it’s not nothing either. Fast forward to today, interest costs are higher, margins are tighter, and refinancing isn’t as straightforward. They’re still standing, but the cushion is thinner. Multiply that across hundreds of deals, and you start to see the broader picture. The phrase that comes to mind is simple: the tide isn’t crashing out, but it’s definitely going out.

Why is everyone suddenly talking about software and AI?

Private equity leaned heavily into software companies over the past decade. Recurring revenue, subscription models, and strong margins checked all the boxes. Lenders followed, financing deals at high EBITDA multiples, often around 20x, with significant leverage. Direct lending portfolios now carry a meaningful chunk of exposure to software, in some cases 20 to 30%. Then AI showed up and changed the conversation. Advances in generative AI, especially tools that can write and automate code, have forced investors to rethink assumptions. If software development becomes more automated, what happens to pricing power, margins, or even demand for certain products?

Source: KKR.com

Markets didn’t react immediately. Then sentiment shifted, almost overnight. Now you’re seeing pressure across the entire sector. Not necessarily because every company is struggling, but because investors are no longer giving everyone the benefit of the doubt.

So, is this 2008 all over again?

There are similarities, but also important differences. Yes, we’re seeing rapid growth, rising leverage, and some opacity in valuations. Private loans don’t trade daily, so pricing relies on models and manager judgment. That can lag reality, especially in volatile periods. Yes, there’s a mismatch between investor liquidity expectations and underlying asset liquidity. That’s not new, but it matters more when stress shows up. And yes, retail capital has entered the space in a bigger way. That always changes the dynamics.

But scale matters. Private credit today is still smaller than the mortgage market that sat at the center of the 2008 crisis. Default rates, while rising, remain relatively contained. This doesn’t look like a systemic blow-up. It looks more like a market growing up. Charlie Munger used to say people believe what they want to believe. For years, the belief was that private credit offered high returns with controlled risk and limited volatility. That story worked, until it didn’t hold perfectly.

What should accounting and finance professionals watch?

• If you’re in audit, valuation, or advisory, expect more scrutiny around fair value measurements. Clients holding private credit assets will face tougher questions on assumptions, discount rates, and comparables.
• If you’re in corporate finance, especially mid-market, the cost and availability of credit could shift. Lenders may tighten terms, demand stronger covenants, or slow down deal timelines. That changes how deals get structured.
• If you’re in a CPA firm advising clients, liquidity planning moves up the priority list. Investors who thought quarterly access was reliable may rethink allocation strategies.

And for anyone reviewing financial statements tied to private credit exposure, the key question becomes simple: how real are the marks?

The Takeaway

Private credit isn’t disappearing. It’s too embedded, too useful, and frankly too profitable for that. But the easy phase is over. What we’re seeing now is what every financial cycle eventually delivers: a reality check. Strong underwriting will matter more. Manager selection will matter more. Transparency will matter more. The market is asking tougher questions, and that’s usually a healthy sign. The bigger lesson feels familiar. Growth stories often look clean until they don’t. Then the details come into focus. Right now, private credit isn’t collapsing. It’s getting tested. And for professionals paying attention, this is where the real insight starts to show.