By Monica Johnson, International Banker
It’s fair to say that private credit has experienced a turbulent 2026 thus far. Investors have headed for the exits due to a myriad of concerns about the health of the roughly $3-trillion sector, including questionable asset quality, the potential impact of artificial intelligence (AI) on the software industry and the likelihood of further incoming regulatory scrutiny. With money still abundantly flowing into private credit, however, are fears of a looming private-credit crunch overblown?
The collapses of automotive-parts manufacturer First Brands Group and subprime auto lender Tricolor Holdings, both of which were backed by private credit and filed for bankruptcy in September 2025, provided early warning signals. Having built capital during a period of low rates and stable demand, First Brands was left with more than $10 billion in debt on its books amid rising financing costs, while Tricolor became exposed as borrowing costs rose and consumer-credit quality weakened, boosting delinquency numbers and putting substantial pressure on the company’s financing model.
The private-credit jitters became more acute by early 2026, when loans linked to software companies began to underperform considerably in secondary-market trading, as advances in AI triggered a broad reassessment of the durability of their longer-term cash flows. Many software stocks have declined sharply since February. The shift was particularly evident in exposures tied to workflow software, developer tools and certain enterprise applications—segments in which AI-driven alternatives or platform-level integrations posed the most immediate competitive threats.
Having previously backed software borrowers based on high margins, recurring revenues and strong retention metrics, credit investors began to question whether those assumptions would hold if AI significantly compressed pricing power or displaced specific product functionalities. Should AI accelerate competitive pressures or reduce switching costs, moreover, the impact could be felt beyond equity valuations and feed directly into credit metrics through weaker revenue growth, margin compression and reduced refinancing options.
Investors deemed parts of the private-credit universe to be distinctly exposed to the possibility of structural obsolescence. Such factors proved crucial in triggering a surge in withdrawal requests during the first quarter, even forcing leading private-credit firms such as Blue Owl Capital, KKR, Ares Management, Apollo Global Management and BlackRock’s HPS Investment Partners to restrict investor redemptions in attempts to manage liquidity and protect the long-term performance of their respective funds.
In early April, for instance, it was revealed that Blue Owl Capital—a leading player in the private-credit space—had limited withdrawals to just 5 percent at both its $3-billion Blue Owl Technology Income Corp (OTIC) fund and $20-billion Blue Owl Credit Income Corp (OCIC) fund after it experienced a massive increase in redemption requests during the January-March period, to the tune of around $5.4 billion. “This decision was made in accordance with the fund structure, reflecting our commitment to balancing the interests of both tendering and remaining shareholders,” Blue Owl explained in a letter to investors.
With such drastic measures being taken by big names in the private-credit universe, are we about to witness a credit crunch in the same mould as the Global Financial Crisis?
With such drastic measures being taken by big names in the private-credit universe, are we about to witness a credit crunch in the same mould as the Global Financial Crisis (GFC)? For private-credit deterioration to escalate into a broader financial crisis, the stress would need to spread beyond individual borrowers and into funding markets, asset valuations and financial intermediaries. The most plausible transmission channel, then, would be through a combination of refinancing stress, valuation adjustments and liquidity constraints interacting simultaneously.
From a refinancing standpoint, it should be highlighted that a large group of companies backed by private equity—particularly those financed earlier at lower base rates and tighter spreads than today and with leverage that assumed continued earnings growth—are approaching maturity over the next 18–36 months. Should borrowers be forced to refinance at materially higher costs, their ability to pay interest on their outstanding debts will decline rapidly. In most instances, this will lead to amend-and-extend transactions, payment-in-kind (PIK) toggles or injections from private-equity sponsors to delay resolution. But if such refinancing channels tighten further, defaults could seriously escalate.
On the valuation front, it should be noted that, unlike public markets, private credit relies on a periodic, model-based approach. Should transactions such as discounted loan sales or restructuring outcomes start suggesting lower recovery values, funds may be forced to mark down their valuations, which, in turn, may intensify existing redemption pressure. Managers may then be forced to further ration withdrawals or even sell assets into illiquid markets.
Private credit’s close association with the banking sector adds another crucial layer of complexity. Although the asset class resides outside of traditional finance, banks nonetheless provide credit lines to funds, facilitate syndications and remain embedded in the broader financing system. When credit conditions worsen in private markets, bank behaviour invariably adjusts, with lending standards tightening, risk appetite narrowing and financing becoming more selective.
There is also a behavioural dimension that has become more relevant as access to private credit has broadened. Publicly traded vehicles that invest in private credit, such as business development companies (BDCs), including Blue Owl Capital, have made the asset class more accessible to retail investors. This in itself introduces new sensitivities to changes in valuations and income expectations. A shift in reported net asset values or distribution profiles can influence flows and sentiment, even in the absence of realised losses, thereby reinforcing tightening financial conditions without a single triggering event.
The more realistic risk scenario, therefore, appears to be cumulative—refinancing pressure leads to restructurings, which, in turn, influence valuation adjustments, thus impacting liquidity and investor behaviour. Finally, tighter liquidity suppresses overall credit availability. Each step on its own may be manageable, but in combination, they can generate a sustained tightening in financial conditions that weighs heavily on corporate activity.
Although such a scenario might underpin the current headlines evoking a 2008-style meltdown, UK wealth-management firm Evelyn Partners argued that with less accumulated debt in the financial system, today’s environment is very different. “Years of steady cash‑flow generation, combined with stricter rules placed on banks since then, have helped borrowers reduce what they owe. Private‑sector debt from households and businesses has fallen from 174 percent of GDP in 2009 to 137 percent at the end of 2025,” the firm contended in a report published on April 13. “Moreover, corporate finances remain in good shape, and US bank lending has grown at a 7 percent annual rate, the fastest since 2023, which should help cushion the impact if private credit lenders become more cautious.”
It should also be noted that although investors may have valid concerns over private credit’s exposure to software companies, portfolios remain diversified across different sectors. “For example, as a share of asset value, financials account for 21 percent, industrials 15 percent, health care 12 percent, information technology 11 percent, and both consumer discretionary and real estate 10 percent each,” Daniel Casali, Evelyn Partners’ chief investment strategist, also noted. “This broad mix helps prevent issues in one sector from spreading across the market, supporting overall resilience.”
As some private-credit investors have exited the space in recent weeks amid the increasingly nervous climate over credit quality and liquidity, other investors are being drawn in to capitalise on the rising yields that have resulted. “Actually, institutional demand is accelerating,” BlackRock’s chief executive officer, Larry Fink, said on a recent earnings call. “Periods of market dislocation are when private credit investment opportunities are most compelling.”
An April 23 report from MarketWatch also confirmed that a surprising amount of capital had been flowing into publicly traded private-credit-related funds that own the debt of riskier companies, including software firms. Citing Deutsche Bank research, such funds, known as CLO (collateralised loan obligation) exchange-traded funds (ETFs), drew in $6 billion in investor cash this year through April 10, almost as much as the total inflows in the latter half of last year.
“Private credit continues to attract investor attention, but the recent bout of broader market volatility has created a notable valuation reset among publicly traded BDCs,” investment firm VanEck explained to MarketWatch, adding that this could open up a potential entry point for investors looking for greater price transparency and daily liquidity in the space.