Hello there,
Last time, we looked at how private credit has been evolving from a complementary financing tool into something much more central to how deals are structured and portfolios are built.
This time, the conversation is changing.
It’s no longer just about growth, opportunity, or positioning within portfolios.
It’s about what happens when the model starts to come under pressure.
Because for the first time in years, private credit is being tested across several fronts at once: liquidity, credit quality, and investor behavior.
When “Patient Capital” Meets Real Withdrawals
Private credit has always been positioned as long-term, stable capital.
Investors commit money for years, and in return, they get predictable income and downside protection. That’s been the core promise. But recently, parts of the market have started to behave differently.
In particular, some of the more accessible private credit vehicles, especially business development companies (BDCs), have seen a sharp increase in investors asking for their money back. In response, several large managers have had to limit withdrawals to protect the structure of their funds.
Private credit assets are inherently illiquid, loans are negotiated privately, held for years, and not easily sold. But some fund structures allowed investors to redeem more frequently, which works well in stable environments but becomes harder to manage when sentiment shifts. What we’re seeing now is the first time that mismatch is being tested at scale.
What’s driving this change is not just short-term sentiment, but also who the investors are. A large part of the recent growth in private credit has been fueled by wealthy individuals, often accessing the asset class through semi-liquid structures that promised regular income with some flexibility. Now, those same investors are pulling back, with billions in redemption requests hitting funds in just the first quarter alone.
This changes the dynamic. Unlike traditional institutional capital, which is typically locked in for years, this pool of capital is more sensitive to market conditions and more likely to move when returns soften or uncertainty increases.
At its core, private credit is closely tied to how private equity deals are financed. In a typical leveraged buyout, part of the acquisition is funded with equity, and the rest is financed through debt — increasingly provided by private credit funds rather than banks or public markets.
From “No Losses” to Normal Credit Behavior
For a long time, private credit benefited from a perception that it delivered high returns with very limited losses.
That perception is now being challenged. Default rates, which have been unusually low for years, are expected to move higher, potentially reaching levels closer to 8%, compared to the 2–2.5% range that had become the norm.
Instead of pushing companies into default, lenders are often restructuring loans behind the scenes, extending maturities, relaxing covenants, or allowing borrowers to pay interest in kind rather than in cash.
These tools help avoid sudden failures, but they also mean that problems take longer to surface and capital can remain tied up in weaker assets for extended periods. So rather than a sharp spike in defaults, the adjustment is likely to be slower and more gradual.
This is one reason why parts of the market can appear stable on the surface, even as underlying risks build, because losses are often delayed rather than immediately recognized.
Even some of the most senior voices in the market are now warning that the adjustment may be more pronounced than many expect. JPMorgan CEO Jamie Dimon just pointed out that when a full credit cycle does arrive, losses across leveraged lending, including private credit, are likely to be higher than investors have been pricing in, in part because lending standards have gradually weakened over time.
And it’s not just bank executives raising these concerns. A growing number of high-profile investors are questioning the sustainability of the current private credit environment. Market veterans like Michael Burry and Jeffrey Gundlach have recently warned that the sector may be approaching a turning point, with some even drawing comparisons to the period just before the 2008 credit downturn.
Where the Pressure Is Showing Up First
The stress in private credit is not evenly spread across the market. It is concentrated in certain types of borrowers and sectors.
Highly leveraged companies, especially those that were financed in a low-rate environment, are now facing higher borrowing costs and tighter financial conditions. At the same time, sectors like software, which make up a meaningful share of many private credit portfolios, are under additional pressure due to concerns about AI-driven disruption.
This combination is important. It’s not just about higher rates or just about sector risk; it’s the interaction between the two that is creating pressure. In some cases, even large and well-known private credit funds have started to mark down the value of certain loans or report weaker performance, which would have been unusual just a year or two ago.
The Bigger Question: Who Ultimately Holds the Risk?
One of the more important developments in recent years is how closely private credit has become linked to the insurance industry.
Life insurers, especially in the U.S., have been increasing their exposure to private credit in search of higher yields, often through partnerships with large asset managers or by allocating directly to private lending strategies.
This has created a new dynamic. Risk is no longer just sitting within private funds; it is increasingly embedded in the balance sheets of insurers, which play a key role in the broader financial system.
That is one of the reasons regulators are paying closer attention. The U.S. Treasury has already begun coordinating discussions with domestic and international insurance regulators to better understand how risks are building and how they might spread.
So far, most market participants are not describing this as a systemic event. There are still important differences compared to past crises, particularly lower leverage within funds and less direct exposure from banks.
At the same time, it would be too simple to dismiss what’s happening as noise. Some investors see this as a healthy adjustment after years of strong growth and favorable conditions. Others believe it may be the early stage of a longer credit cycle turning.
Both interpretations can exist at the same time. Because what we are seeing is not a sudden shock, but a gradual repricing of risk across the asset class. Part of the challenge is that the market has not gone through a real credit downturn in quite some time, which has led some participants to assume that the current environment, low losses, and stable performance is the norm rather than a phase of the cycle.
For years, private credit was often described as stable, predictable, and insulated from market volatility. Now, it is becoming clear that it is still, at its core, a form of credit. And like any credit market, it goes through cycles — even if those cycles play out more slowly and less visibly than in public markets.
What’s unfolding is not just a test of individual funds, but of the model itself, how private credit behaves when liquidity tightens, defaults rise, and the investors who fueled its growth begin to step back.
The Other Side of the Debate: Structure Still Matters
Not everyone sees the current developments as a sign that something is fundamentally broken.
From the perspective of large private credit managers, what’s happening today looks more like a normalization after an unusually strong period, rather than the start of a systemic downturn. Defaults are rising, but they are rising from historically low levels, and some argue this is simply what a maturing asset class is supposed to look like as it moves through a cycle.
More importantly, they point to the structure of private credit itself as a key difference. These loans are typically senior in the capital structure and backed by significant equity cushions, often around 60%, which means that company valuations would need to decline materially before lenders start taking losses.
There are also important differences compared to past credit cycles. Unlike the pre-2008 banking system, private credit funds today tend to operate with lower leverage, more conservative loan-to-value ratios, and funding structures that are not reliant on short-term liquidity. That reduces the risk of forced selling and sudden market dislocation, even in periods of stress.
Even the recent wave of redemption limits is framed differently from within the industry. Rather than being a sign of fragility, these mechanisms are designed to protect investors by avoiding forced asset sales and preserving long-term value when markets become more volatile.
Let’s Continue the Conversation at 0100 Europe
At 0100 Europe, we keep the discussion going with the panel “Private Credit 2.0: From Niche to Mainstream.” The session brings together perspectives from across the ecosystem, from institutional allocators to direct lenders, to unpack how private credit is evolving beyond a financing tool into a core investment strategy.
With speakers from firms like Aegon Asset Management, Tikehau Capital, and Oaktree, the panel will offer a grounded view on where the opportunities still exist, where risks are building, and how the next phase of private credit will be defined in a more complex and selective environment.
The focus will be on what is actually driving that shift today: the rise of direct lending, the increasing use of flexible and bespoke capital solutions, and how both GPs and investors are using private credit not just to fund deals, but to actively shape outcomes and manage risk across portfolios.