“Oh, there ain’t no rest for the wicked
(and) Money don’t grow on trees
I got bills to pay, I got mouths to feed
There ain’t nothing in this world for free…”
(From “Ain’t No Rest for the Wicked,” by Cage the Elephant, 2008)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
In Part I of this two-part blog series, we focused on the public debt markets in the US and shared our opinion that those markets are in reasonable shape, albeit with muted potential for total return.
Here in Part II, we turn our attention to the private credit markets, which have received a huge amount of (mostly negative) public and media attention this year.
In our opinion, some of this criticism is potentially warranted, but much of it is overblown.
In this blog we will try to peek behind the curtains and get an accurate gauge of the current and potential future state of private credit. Despite the scrutiny, it is a growing and vital component of the US capital markets, it is not going away, and investors ignore it at their peril.
Let’s dive in.
Current State of the Private Credit Market
It is impossible to talk about global rates and credit without including a discussion of private credit, which has exploded over the past 5-7 years and is expected to continue to grow exponentially.
Sources: Preqin, BlackRock, McKinsey, as of June 2026. Future growth rates are estimates and subject to change as market conditions change.
There are arguments in favor of private credit for investors seeking enhanced yield within their portfolios:
- The primary competitor to private credit in the direct large and middle market lending space is the bank syndicated loan (BSL) space which, after lying fairly dormant for several years following the regional banking crisis of 2023, has revitalized and is expected to grow over the next several years.
Source: The Business Research Company and CoinLaw, as of March 2026. Future growth rates are estimates and subject to change as market conditions change.
- The difference between private credit and the BSL market is the ultimate holder of the loan. In the BSL market, the majority of loans are bundled into Collateralized Loan Obligations (CLOs) and sold off to institutional and individual investors. We can see this illustrated in the current and expected growth of the CLO market.
Source: MarketWide Research, “Collateralized Loan Obligation Market Size, Share, and Industry Trends Forecast 2026-2036,” May 2026. Future growth rates are estimates and subject to change as market conditions change.
The result is that there is the potential that due diligence is not as robust in the BSL market since, for the most part, the underwriting banks will not be holding the loans to maturity.
We don’t want to overstate this, but a primary difference in the private credit space, other than a small subset of secondary market transactions, is that the underwriters of a given loan tend to hold that loan until maturity or refinancing, and so an argument can be made that the underwriting standards are more stringent.
These underwriting standards have been called into question over the past two quarters, as redemption requests increase and loan mark-downs increase. We will address this in greater detail later in this blog.
Another aspect of private credit worth highlighting is the primary investment structure/vehicle being deployed, which is the “evergreen” structure – quasi-liquid vehicles registered under the Investment Company Act of 1940 (similar to mutual funds and ETFs, but not with daily liquidity).
Generally, these vehicles fit the nature of private credit very well – the money is put right to work (i.e., minimal to no “J-curve”), coupons are paid regularly, and the liquidity terms align reasonably closely with the underlying loan structure (but with the potential for the “gating” of redemptions if there is excessive demand – the phenomenon we have witnessed over the past two quarters).
As a result, growth in the AUM of evergreen private credit facilities is expected to grow over the next several years.
Despite this growth, it is important to note that it is also these evergreen facilities that are currently facing the most scrutiny following an avalanche of redemption requests in the first two quarters of 2026.
Source: MSCI, “The State of Private Markets 2026,” data as of May 12, 2026.
How is the Private Credit Market Performing?
Given the explosive growth of private credit over the past few years, this begs the question of how outstanding loans are performing, and it is here that we see the focus of media and investor attention.
The potential trouble began in January of this year when the artificial intelligence firm Anthropic launched the “Claude Cowork” AI agent, which was viewed as a direct and disruptive threat to the so-called “Software as a Service” (SaaS) industry.
The issue is that the broader private markets have lent heavily into the SaaS space, and investors reacted by driving down the share prices of publicly traded BDCs (Business Development Companies) which had exposure to SaaS companies and also clamoring for redemptions from private credit funds.
Let’s “unpack” this phenomenon by first examining the actual exposure of private credit to the SaaS industry (first chart) in comparison to the market reaction from that exposure (second chart).
Sources: A compilation of data from Golub Capital, Ares, and Blue Owl, as of June 2026.
Source: The Bank for International Settlements (BIS), as of March 16, 2026.
We see that SaaS firms represent roughly 18% of the total loan allocations of private credit – roughly 30% if we include “technology” more broadly.
Keep in mind that private credit represents less than 5% of the total US credit market.
Source: The Federal Reserve Bank, as of June 2026.
This hardly represents a “systemic threat” to either private credit or the broader credit market overall, especially when compared to the Great Financial Crisis (GFC), when mortgages and mortgage-linked securities were estimated to be 35%-50% of the total credit market.
What we do not see is a growing number of “cockroaches” so famously bandied about in the media over the past few months. Hard default rates remain fairly low, though we do see an increase in so-called “Liability Management Exercises” (LMEs), including both “Payment in Kind” (PIK) debt and “Maturity Extensions,” which is just another way of saying loan restructuring.
Keep in mind that the following chart does not show what percentage of the total loan exposure is subject to each form of LME, but that what percentage of total LMEs is represented by each type of loan restructuring.
Keep in mind as well that the following chart is representative of the total private credit market, not just the SaaS and overall technology sectors.
Source: Moody’s, Fitch, and Pitchbook, as of June 2026. What this chart illustrates is that, of the total amount of “LMEs” in the overall private credit market, ~15% are “hard defaults,” ~25% are “maturity extensions,” and ~60% are “PIK or interest deferrals.”
We see that PIK debt and maturity extensions now constitute the majority of distressed loan management, outweighing actual payment defaults. We pay particular attention to the level of “PIK” or payment-in-kind debt (i.e., paying off debt by issuing more debt).
If it is part of the original deal structure, PIK debt can be an acceptable form of debt structuring, but if PIK debt is used as part of an LME, it may signal increased distress by a given borrower.
We do see a greater level of PIK introduced via an LME vs. an origination, which we do not view as a positive trend but, again, it does not (yet) seem to represent any serious level of systemic risk.
Source: Moody’s, Fitch, and Pitchbook, as of June 2026.
As another comment, we note that much of the media scrutiny has been focused on the largest (and publicly traded) private credit firms.
But a slightly deeper look indicates that the majority of the challenges facing the private credit market are actually being felt by the smaller lenders, and in any event still represent a relatively small total of the overall loan portfolios.
Source: MSCI, “The State of Private Markets 2026”, as of May 12, 2026.
Software Sector Vulnerability?
One thing that is true is that the majority of current private credit loan write-downs are occurring in the software (SaaS) sector.
Source: Apollo Academy, data as of March 31, 2026.
And this is having a definite effect on the interest rates charged to software sector borrowers.
Source: Apollo Academy, data as of March 31, 2026.
Furthermore, we see the software sector, in general, has lower interest rate coverages and higher leverage than other private credit sectors.
Source: Apollo Academy, data as of March 31, 2026.
And, finally, the software sector faces some level of refinancing risk as its “maturity wall” comes due.
Source: Apollo Academy, data as of February 2026.
So, while it is clear that software is the most “stressed” sector within private credit, we need to put this in perspective.
Remember from above that software represents roughly 18% of overall private credit exposure. So, if 37% of software loans are trading at below 80% of NAV (and, to emphasize the point – these loans are not in default, they are simply trading at steep discounts to NAV), then 0.37 x 0.18 = 7% of total private credit loans are trading at steep discounts to NAV.
This, in our opinion, does not warrant the “run on the bank” we witnessed in the first two quarters of 2026 with respect to redemption requests.
Summary and Interpretation
We acknowledge the stress currently surrounding the private credit market. In Q1 many sponsor lending firms were faced with redemption requests that exceeded their contractual 5% terms – in many cases dramatically exceeding the 5% level.
Different firms reacted in different ways – some met all redemption requests, some temporarily increased the redemption levels by some percentage, and others stuck firm to their contractual 5% redemption levels.
We may be in the contrarian camp to suggest that those firms that stuck to their contractual 5% redemption gates actually did the best job of servicing their clients for the long term.
We understand the investor concerns and their corresponding redemption requests – they could not be sure there would not be continued deterioration in the private credit space, and they wanted to be “first in line” to get their money back.
But let’s play this out. Under a normal redemption environment, where an investor can get back 5% of their invested capital every quarter, it would take five years (20% per year) to fully recoup their investment. This time horizon extends even further if redemption gates go up and investors get less than 5% back in any given quarter.
During that time, they would be earning interest on all non-defaulting outstanding loans (which we know represents the majority of the portfolio), thereby reducing the time it would take to recoup their capital.
Some of the loans may face distress, restructuring, or outright default (ex-whatever recovery is realized). But it is highly unlikely the entire loan book defaults to zero, and only a small percentage of loans (<20%) are in the sector – software – that is viewed to be distressed.
Furthermore, the larger, more well-established lending firms are facing less distress than smaller firms (as suggested by the chart above).
This leads us to several conclusions:
- We are not “out of the woods” yet. We fully expect the industry to face several more quarters of high redemption requests. We actually view it as a positive that more sponsor firms are reverting back to their contractual 5% redemption levels – it lowers the risk of having to sell “money good” loans at a discount to meet elevated redemption requests. Remember, the majority of loans are performing as expected, with low levels of default or “LMEs.”
- The systemic risk to the overall credit market is overstated. Yes, some investors may face some level of loss, which is an unsatisfactory outcome for any investor, though there was never any lack of transparency that these loans were being made to unrated or speculative grade borrowers. But we simply do not see the current state of affairs as an existential risk to the overall credit market or broader economy.
- The underwriting sponsor firm – as always – is critically important. With any alternative or private market investment, manager selection is critical. As a reminder, let’s review the return dispersion between top and bottom quartile managers within the alternative and private markets. If you want to invest in the private markets, it is absolutely essential that you work with experienced, top-quartile managers.
Source: JP Morgan “Guide to the Markets,” as of May 29, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
- Patience is a virtue – “this, too, shall pass.” Most capital markets go through periods of euphoria and panic, and private credit is no different.
The regulatory lending constraints placed on banks because of the Dodd-Frank bill of 2010 (specifically the higher capital and liquidity requirements), followed by the regional bank scare of 2023, opened the door to the private credit market.
Borrowers still needed capital and banks were less willing to lend, so private credit filled the gap. This phenomenon was catalyzed even further with the evolution of evergreen strategies, which made private credit available to a much wider audience of potential investors.
It is probably fair to say that lack of investor education and/or understanding contributed to the current situation. Investors may have heard (or been told) these strategies were “semi-liquid” and translated that to mean the underlying investments could be easily liquidated if they wanted or needed their money back.
But it is absolutely critical to remember that the typical quarterly 5% redemption gates are a feature and not a bug of the evergreen fund structure.
The underlying loans are long-term investments that are meant to be held to maturity, which is 5-10 years.
The quarterly redemption feature offers some level of liquidity, but these should not be considered liquid investments.
Within a client’s overall portfolio, private credit should be well down the “liquidity waterfall” if the client needs money quickly.
Source: Capital Group, “How much Liquidity Does Your Portfolio Need?,” January 2026. For illustration purposes only and does not represent investment advice.
Despite the recent media scrutiny, we still believe private credit is a viable option for those clients who can access it and are seeking higher yield. We like private credit because we believe it can offer better pricing (yield), due diligence, and deal structure in comparison to the public markets.
We do believe we are not through the current turbulence of the software lending concerns, but we believe the overall risk is overstated and patience is the appropriate path for those investors already invested in the space.
For new or returning investors, we do believe the dominant market in private credit – private equity-sponsored direct middle market lending – is getting crowded, and we may be witnessing a decline in pricing, lending standards, and due diligence, as well as the health of existing loans.
With that said, we still prefer the private credit market to the public one in the current market environment. Even with the “crowding” of the direct middle market space, quality sponsors and managers are still realizing attractive yields and low distressed/default rates.
In addition, we are exploring a variety of less crowded and more specialized spaces where we believe there may be appealing opportunities for diversifying exposure and generating premium yields while taking appropriate levels of credit and liquidity risk.
As always, we welcome your questions and feedback.