Private Credit Explained: How the Quiet Overachiever of Finance Hit a Wall in 2026

Okay, so let me explain what happened here. Because this story has a before and an after, and you need both to understand why 2026 matters.

For most of the past decade, private credit was the quiet overachiever of the financial world. Pension funds loved it. Institutional investors kept allocating to it, steadily and consistently. And while public markets were lurching through interest rate shocks, a pandemic, and waves of geopolitical turbulence, private credit portfolios kept reporting something almost boring: smooth, steadily rising values, quarter after quarter, almost without exception. No drama. No volatility. Just returns.

And then 2026 arrived.

In early 2026, investors tried to pull money out of some of the largest private credit funds in the United States. And they could not get it all back. Apollo, Ares, Blackstone, and BlackRock’s HPS unit all received withdrawal requests that blew past the 5% quarterly redemption limits built into their semi-liquid vehicles.

Let me give you the specific numbers, because they matter. Apollo’s flagship fund received redemption requests equal to 11.2% of its net assets in a single quarter. It honored just 5% of that. Which means every investor who asked to leave received approximately 45 cents back for every dollar they requested. The rest stayed locked in. Blackstone went a different route. Rather than let a redemption cap visibly trigger and become a headline, it injected $400 million of its own balance sheet capital to meet investor withdrawals.

Now, here is the thing. None of these individual events is catastrophic on its own. The redemption caps were designed precisely for moments like this. But here is why this moment is different from anything we have seen before in retail-accessible private credit: it was not just one fund. It was multiple flagship vehicles, across multiple major managers, all at the same time.

For the first time in the brief modern history of private credit opening itself up to retail and semi-institutional investors, the structure of the product became the headline, not just the performance of the underlying loans. Investors stopped asking “how are the borrowers doing?” and started asking “can I actually get my money back?” That is a very different question. And this post is going to answer it.

Alright, let’s start from the beginning. To understand private credit, you first need to understand what happened to banks after 2008.

The Global Financial Crisis showed something ugly: banks had been handing out enormous, risky loans while sitting on almost no capital as a buffer. Think of it like lending your friend $10,000 with only $200 in your own bank account. When things go wrong, you have nothing to absorb the loss. And things went very, very wrong.

So regulators stepped in. They passed rules called Basel III and the Dodd-Frank Act, which basically told banks: you need to hold way more capital against your riskiest loans. And the riskiest loans? Those are leveraged loans, the kind private equity firms use to buy companies that already carry debt above four times their annual operating earnings. We call those earnings EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is the standard measure of what a business actually earns from its operations before financing costs. Those loans became so expensive to keep on bank balance sheets that banks started walking away from them entirely.

And that right there is why private credit exists.

Banks stepped back, and mid-market companies were left scrambling. These are businesses with annual EBITDA between $10 million and $150 million. Not tiny startups. Not Fortune 500 giants. The middle. For decades, they financed themselves through bank loans and high-yield bonds. Once banks pulled back, non-bank lenders saw the opening and built what we now call the private credit market.

Let me walk you through exactly how it works.

A private equity firm wants to buy a company at seven times EBITDA. To do the deal, it brings in $400 million of debt from a private credit fund. That fund holds the loan directly on its own balance sheet, no middleman, no syndication. It collects interest every month and gets fully repaid when the private equity firm sells the company, typically four to six years later. The interest rate floats with SOFR, which stands for the Secured Overnight Financing Rate, plus a negotiated spread of usually 500 to 700 basis points. At peak rates in late 2023, that math meant borrowers were paying around 11 to 12% all-in. The lender collects that same return.

Now, private credit is not just one thing. This is where most explanations skip the details, so let me slow down.

Direct Lending is the big one. This is what we just described: a fund loans money directly to a mid-market company, usually to fund a private equity buyout. It is the dominant strategy in the market today. Mezzanine Debt sits between senior secured loans and equity in the capital structure. It carries higher risk and demands higher returns, often 12 to 18%. Unitranche Lending bundles senior and subordinate debt into a single loan with a blended interest rate. Borrowers love it because they deal with one lender instead of two. Venture Debt goes to early-stage or growth-stage companies that have already raised equity, giving them cash runway without forcing another dilutive equity round. Distressed Debt involves buying the loans or bonds of companies already in trouble, at a discount, and either restructuring the business or profiting from recovery. Asset-Based Lending secures the loan against specific collateral: real estate, equipment, receivables, or inventory. And Real Estate Debt covers private loans for commercial property projects, again outside the traditional bank channel.

The lending side of this market is highly concentrated. Ares Management, Blackstone Credit, Apollo Global Management, Blue Owl Capital, HPS Investment Partners acquired by BlackRock in 2025, and Golub Capital dominate origination. In 2024, the top 20% of managers by assets under management deployed roughly 85% of all capital in the market. The global private credit market now sits at approximately $3.5 trillion in assets under management, a 14% compound annual growth rate over the past decade, and Preqin projects that number could reach $4.5 trillion by 2030.

So why do investors actually want this?

The pitch is genuinely compelling. You earn more, roughly 200 to 360 basis points more than you would by putting the same money into publicly traded high-yield bonds or leveraged loans. On a large allocation, that spread is real money every single year. The rate floats, meaning when interest rates go up, your income goes up with them. You saw this play out for private credit investors between 2022 and 2023, when the Fed raised rates aggressively and private credit yields climbed right alongside them. Public bond investors holding fixed coupons watched their prices fall. Private credit investors watched their income rise. And you get a seat at the table. Because these are direct, negotiated loans, lenders can demand protections that public bond markets simply do not offer: covenants that limit how much additional debt the borrower can take on, requirements to maintain certain financial ratios, and reporting obligations that give the lender early warning if something starts going wrong.

So the proposition is strong. Higher yield, floating rate, stronger protections. But here is the question this whole post exists to answer: what do you give up for all of that? The events of early 2026 answered that question in the most uncomfortable way possible.

Okay, so now we get to the part most people skip. Every attractive feature of private credit has a counterpart risk. Let me explain exactly what you are giving up.

Private credit is, structurally, an illiquid asset class. The loans do not trade on exchanges. There is no live price for the loan your fund made to a mid-market software company in 2022. If a lender wants to exit a position, they generally negotiate a private sale in the secondary market, often at a meaningful discount, with limited price transparency.

Instead of a live market price, private credit funds use a quarterly valuation process. Funds hire independent third-party valuation agents to assess the fair value of each loan using comparable public loan prices and judgment about credit quality. It is a rigorous process, but it is inherently backward-looking, smoothed, and subjective in ways that market prices are not. The result? Private credit NAV looks considerably less volatile than public credit. This has been enormously important in marketing the asset class. But it requires very careful interpretation.

Here is the core insight: lower reported volatility does not mean lower actual risk. It often means the risk is just showing up later.

Let me explain how we got from “everything is fine” to “why can’t I get my money back?” Because the transition did not happen overnight, and the mechanics matter.

The private credit boom from 2015 to 2021 happened under conditions that were, in retrospect, unusually favorable for borrowers. Interest rates sat near zero. Private equity activity hit record levels. Competition among lenders intensified, pushing spreads down and loosening underwriting standards. By 2021, leveraged buyouts were being done at purchase price multiples of 12 to 15 times EBITDA, financed at all-in interest rates of approximately 5 to 6%. The numbers worked because money was nearly free.

Then, between March 2022 and July 2023, the Federal Reserve raised its benchmark rate by 525 basis points in 16 months. That is one of the fastest tightening cycles in modern history. SOFR moved from near zero to above 5.3% by mid-2023.

Now here is the number I want you to sit with. A company that borrowed $300 million in 2021 at SOFR plus 500 basis points paid about 6% in total annual interest when SOFR sat near its 1% floor. That same loan at SOFR 5.3% costs 10.3% annually. Annual interest expense jumped 72% with no change in the loan amount, no deterioration in business performance, and no warning. The loan did not get worse. The rate environment did.

Now let me add the valuation problem on top of that. A private equity firm that bought a software company at 18 times EBITDA in 2021 and financed it with a loan equal to 40% of enterprise value now owns an asset whose equity value has collapsed, even if revenues are flat. The loan itself may be technically current: interest is paid, covenants are met. But the equity cushion protecting the lender has been severely thinned. This is the hidden stress that does not appear in headline default rates.

And then there is the maturity wall. Approximately $600 billion in performing private credit loans matures through 2028. These are loans originated in 2020 to 2022, when all-in borrowing costs were 5 to 6%. Refinancing them today costs 9 to 11%. That gap, for hundreds of billions of dollars of debt, is the forced reckoning that the next few years will bring.

Okay, this is the part that surprises most people when they first learn it. When a borrower starts struggling, you as an investor in the fund often do not find out for a year or two. Let me explain exactly why.

A typical private credit borrower enters stress gradually. EBITDA misses its plan. Interest coverage falls. The first tool the borrower reaches for is something called a PIK toggle. PIK stands for Payment In Kind. Instead of paying interest in cash, the borrower adds the interest to the principal balance. A $100 million loan at 10% that toggles to PIK becomes a $110 million loan after one year, without the borrower writing a single check. The loan stays current. No alarm bells go off. PIK was historically a feature of genuinely distressed mezzanine debt. In the current cycle, it migrated into mainstream direct lending. By mid-2024, approximately 10 to 12% of BDC interest income was PIK rather than cash.

If PIK does not solve the problem, the next tool is a covenant amendment. When a borrower approaches a breach of a financial covenant, the lender and borrower sit down and negotiate. The lender waives the breach, typically in exchange for a fee and slightly tighter terms going forward. The loan stays performing. No impairment gets booked. The full sequence from early stress to formal default can take 12 to 24 months, and most of it stays invisible to outside investors the entire time.

So now let me connect all of this to the headline you probably came here for: why investors could not get their money back in early 2026.

Non-traded BDCs and evergreen private credit funds are, by design, semi-liquid products. They offer investors a quarterly window to exit, subject to caps of typically 5% of net assets per quarter. The caps exist because private loans cannot be liquidated on demand. This structure worked smoothly as long as three conditions held: a steady stream of new investors buying in, a steady stream of loan repayments coming in from borrowers who refinanced or got acquired, and a small enough number of investors trying to exit at any given time.

In late 2025 and into Q1 2026, all three conditions deteriorated at the same time. New inflows slowed. Loan repayments slowed because M&A activity stayed subdued. And the number of investors seeking exits surged, driven by AI disruption concerns in the software sector, broader market volatility from tariffs and geopolitical uncertainty, and growing awareness among wealth-channel investors that they had bought something considerably less liquid than they perhaps fully understood when they signed the documents.

The result was the redemption episode we described at the top of this post. And importantly, it was not one fund having an idiosyncratic problem. It was a system-level signal.

Alright, now we get to the question that is genuinely unresolved, and where smart people disagree. When a private credit fund reports a loan at or near par, meaning at or close to face value, is that accurate? Or is it a combination of accounting convention and a manager’s understandable reluctance to recognise losses that have not yet formally crystallised?

The manager case is principled. They hold loans to maturity as a general practice. If a borrower is still paying interest, if there is no imminent default trigger, and if the underlying business continues operating even under pressure, then a loan to that borrower can legitimately be valued near par. The market value of the loan, if it were traded, might be 88 or 92 cents because public investors demand a premium for the liquidity they do not get in a private loan. But the expected cash flow to a lender who plans to hold to maturity might still be 98 or 99 cents. Different holding strategy, different fair value. Both defensible.

The skeptical case is equally principled. Many private credit loans stay marked at par even for borrowers facing genuine stress, because the lender considers them buy-and-hold investments and does not need to reflect a distressed market price. For loans originated in 2020 to 2021 at purchase price multiples that no longer reflect current market values, par marks may materially overstate what a lender would actually recover if forced to sell or if the company defaults. The SEC flagged this conflict of interest explicitly in 2024: advisers who both manage funds and determine valuations of those same assets have an inherent incentive to mark assets favorably, because fees and reported performance both depend on NAV.

And here is the market’s real-time verdict: publicly traded BDC stocks were trading at 10 to 15% discounts to reported book value in Q1 2026. That discount is equity investors essentially saying: we do not fully believe the NAV.

Let me explain why enterprise software sits at the center of this story. Because it does not show up there by accident.

Software became the dominant borrower in private credit for reasons that, at the time, seemed entirely logical. Software companies generate recurring revenues from subscriptions, giving lenders predictable cash flows. They carry very high gross margins, often 70 to 80%. They require minimal physical capital. And customers face high switching costs, which reduces the risk of revenue churn. From a credit perspective, these look like dream borrowers.

Lenders responded by extending extremely generous terms. Outstanding loans to SaaS firms grew from almost $8 billion in 2015 to over $500 billion by end-2025, representing 19% of total direct loans. According to Morgan Stanley, software accounts for approximately 26% of total private credit direct lending exposure. According to S&P, software and technology represents about 25% of the private credit market as of year-end 2025.

Now enter AI. The disruption hypothesis does not require catastrophic business failure to create credit problems. It requires only moderate disruption to a business model that was valued and financed on optimistic assumptions. If a software company’s annual growth rate declines from 15% to 5% because AI agents replace some of what it does, its enterprise value falls significantly. That might be enough to move the loan from well-covered to under-covered on a loan-to-value basis, even if the company never misses a payment. Software companies’ stocks collapsed by almost 30% between October 2025 and February 2026. BDCs with higher SaaS exposure underperformed their peers by around 5 percentage points over that same period.

Here is something I want to be upfront about: private credit has always had a transparency problem. And understanding what you can and cannot see matters a lot right now.

Private credit loans are generally unrated, which means they lack the layer of scrutiny that ratings agencies provide on public bonds. There is no transparent secondary market showing current valuations. Unlike a publicly traded bond, where you can observe the price on any given day and infer the market’s current view of credit quality, a private loan’s price exists only in a quarterly valuation document prepared by the manager.

What you can observe, if you know where to look, is the behaviour of publicly traded BDCs. Companies like Ares Capital, FS KKR, and Blue Owl file quarterly reports with the SEC that disclose every single loan in their portfolio, including the fair value assigned to each. These disclosures give a real window into private credit that does not exist for closed-end funds or managed accounts. But even within BDC disclosures, sector classifications are not standardised. Some managers classify a software company by end market rather than by technology category, meaning true software exposure may be understated in aggregated data.

What investors cannot easily see is the extent of loan amendments, PIK conversions, covenant waivers, and informal restructurings that happen continuously in private credit portfolios. A loan can move through multiple rounds of amendment and PIK toggling before it appears in any public filing as anything other than performing at par. The transparency that exists at the line-item level in BDC filings is real. But the standard metrics, reported NAV, non-accrual rate, and weighted average spread, tell you less than they appear to at first glance in an environment of rising credit stress.

Okay, let me zoom out and give you the framework for where we actually are right now. Because private credit has passed through three distinct phases in roughly a decade, and each one matters for understanding the current moment.

The expansion phase ran from 2015 to 2021. Banks retreated, private credit filled the gap, and spreads stayed wide relative to public markets. Defaults were nearly nonexistent. The asset class proved itself during the brief COVID disruption of 2020 before the Federal Reserve flooded markets with liquidity and everything recovered quickly.

The rate shock phase ran from 2022 to 2024. SOFR moved from near zero to above 5%. Borrower coverage ratios compressed sharply. PIK adoption increased. Formal default rates stayed low in part because managers actively worked with borrowers to avoid triggering formal defaults, and in part because the underlying economy remained stronger than many forecasters expected.

The stress test phase began in late 2025 and continues as of early 2026. AI disruption anxiety layered on top of coverage ratio compression. Redemption requests at non-traded BDCs exceeded cap levels simultaneously across multiple platforms. Software loan quality came under serious scrutiny. This is best understood not as a systemic crisis but as the end of what one analyst called the zero-loss fantasy: the beginning of a return to a more normal credit cycle where underwriting quality, sector concentration, and manager skill genuinely differentiate outcomes.

So what should you actually watch over the next 24 months? Let me walk you through the specific variables that will drive how this plays out.

The rate environment remains the single largest factor. SOFR is currently expected to remain around 4.0% through the end of 2027. That is substantially lower than the 5.3% peak but still far above the near-zero rates at which many 2020 to 2021 vintage loans were underwritten. For borrowers with $480 billion in maturing debt coming due through 2028, the difference between refinancing at 9% versus 11% is the difference between manageable and distressed.

The private equity exit environment matters enormously. Most direct lending loans get repaid not through the borrower’s own cash generation but through the private equity sponsor selling the business. PE dry powder exceeds $2.7 trillion. For that capital to circulate, deals need to transact. If M&A recovers meaningfully in 2026, loan repayments accelerate and provide an empirical test of whether private credit valuations were justified. If M&A stays subdued, the maturity wall gets considerably more difficult to manage.

Manager differentiation will be a more important factor in the next phase than it was during the expansion. When all boats are rising, portfolio construction discipline is very hard to distinguish from luck. In a normalising credit cycle, the dispersion of outcomes across managers will widen. The ability to work through problem credits, the quality of covenant documentation, the rigor of original underwriting, and the depth of relationships with borrowers and sponsors will all become visible in ways they were not during the benign years.

Alright, let me bring all of this together. Because I want to leave you with a clear picture of what this moment actually means.

Private credit has had a remarkable decade. It grew from a niche strategy used primarily by institutional investors into a $3.5 trillion global market that now touches wealth management clients, insurance portfolios, and pension funds across the developed world. The structural case for the asset class, filling the funding gap left by regulated banks, remained intact throughout and continues to have merit.

What changed is the environment in which the asset class operates, and the expectations of investors who entered it relatively late in the cycle. Interest rates moved from near zero to the highest levels in fifteen years and stayed there. Coverage ratios compressed. Software, the sector that defined much of the expansion, now faces a genuine technological question that its original lenders did not model for. And the retail distribution of semi-liquid vehicles created a constituency of investors whose liquidity expectations did not perfectly match the structural realities of the product they owned.

None of this adds up to a systemic crisis. The comparisons to the Global Financial Crisis are genuinely inapt. Private credit funds are not levered 25 to 40 times the way investment banks were in 2007. The liabilities of private credit funds do not come due on demand the way bank deposits do. But “not a GFC” and “no problems” are not the same thing, and I want to be clear about that distinction.

The current period is best understood as the first real credit cycle for a relatively young asset class. One that experienced enormous inflows during an unusually benign period and is now encountering the normal machinery of credit stress. The next few years will separate the managers who understood credit from those who simply benefited from a rising tide. That is a more interesting, and more honest, story than the smooth line on a NAV chart ever suggested.

And now you understand exactly why.