The $1.8 trillion private credit market is currently undergoing significant strain, with Bloomberg Originals highlighting how AI is exposing hidden risks that are deterring some investors and potentially leading to a reckoning. This follows a period of rapid growth in the industry, which had attracted substantial investment from insurers, retirees, and wealthy individuals seeking high-growth opportunities and lucrative management fees for firms like Apollo, Blackstone, BlackRock, Ares, Blue Owl, and KKR.
Several indicators point to increasing stress. According to Fitch Ratings, the private credit default rate reached 5.8% through January, including "extend-and-pretend" events that signify severe financial distress. Troubled loans held by major private debt investors have surged to levels last seen in 2017, when the industry was grappling with the aftermath of an oil price crash. The value of non-accrual loans—where borrowers have stopped payments or are expected to default—in the 20 largest publicly traded business development companies (BDCs) increased to a median of 2.8% of their cost in Q2, up from 2% in Q1. Investor capital is also getting trapped, with over $4.6 billion now subject to withdrawal limits as investors attempted to pull approximately $13 billion from more than a dozen such funds last quarter.
Industry leaders acknowledge the shift. David Golub, co-chief executive of Golub Capital, described the situation as a "Darwinian moment" for private credit, predicting lower returns and capital inflows, which will lead to a consolidation favoring fewer, larger firms. He noted elevated credit stress and higher-than-usual credit defaults, emphasizing that the sector exhibits cyclicality. While some executives, like Craig Packer of Blue Owl and Jim Miller of Ares, maintain that credit metrics are healthy and issues are isolated, others, such as Armen Panossian of Oaktree, are adopting a more defensive posture, conserving capital in anticipation of increased market volatility.
The impact is visible in share prices and fund restructuring. Listed BDCs managed by KKR and BlackRock have seen declines exceeding 15% over the past year, and Apollo's fund has lost 14.5% for investors. BlackRock, for instance, sold a $523 million block of loans from its TCPC vehicle to bolster its balance sheet and is exploring options for its future, including a potential wind-down. Analysts like Mitchel Penn of Oppenheimer believe BDC share prices are "priced for death," with research showing that bottom-quartile funds have generated returns on equity below the yield of a 10-year Treasury, suggesting that prior underwriting standards may not have been sufficiently rigorous.
