The Market Is Worried That Private Credit Is the Next Shoe to Drop. 5 Things Investors Need to Know.

Over the past nearly two decades, private credit has grown into a nearly $3 trillion industry. The tightening of banking regulations following the 2008 financial crisis limited lending by large, mainstream financial institutions.

Meanwhile, private credit firms found ways to make loans more quickly and with more flexible terms, while offering investors compelling returns, much of which occurred in a low-interest rate environment when investors sought higher return vehicles.

However, private credit seems to operate much more in the shadows than traditional banks, many of which are subject to three regulators, so there is less insight into the kinds of credit these companies hold and whether they are valuing the loans prudently. A higher interest rate environment, struggles in the software sector, and high redemption requests have led many in the market to believe that private credit could be the next shoe to drop.

Here are 5 things investors need to know.

Image source: Getty Images.

1. What is private credit, and how does it work?

Private credit is a broad term for several types of non-bank lending. These include mezzanine lending, distressed debt, special situations with a high degree of customization, asset-backed lending, and direct lending, much of which is to companies with junk-rated debt. Direct lending is currently the main concern for investors.

In one of these direct loans, a non-bank will typically issue a loan to a company with a high floating-rate yield that in recent years has ranged from 7% to over 12% and yielded a premium to the public markets, according to data from JPMorgan Chase.

The deals are often done with customized terms referred to as covenants, which help manage risk and may also impose restrictions on certain corporate actions of the borrower. Many of the loans also typically sit in the senior part of a company’s capital stack and have regular loan payment schedules, which provide some protection.

That’s why you may have heard investors refer to these loans as bond-like instruments with equity-like returns: They have higher priority in a company’s capital stack and can generate returns that rival equities in the high single-to-low double-digit percentage range. Once primarily targeted at middle-market companies, private credit has been tapped by large blue chip and smaller companies alike, due to the flexibility.

Investors are largely institutional, including pension and insurance funds, family offices, and sovereign wealth funds. But high net-worth individuals and even retail investors have also been able to invest.

2. Who are the major players?

Now, there are different ways investors can gain exposure to private credit. Investors can buy them on public markets through exchange-traded funds (ETFs), closed-end funds, publicly traded business development companies (BDCs), or by purchasing the stocks of large asset managers that have private credit funds, among other businesses.

Institutional investors can also invest directly in private credit funds, often through lock-up agreements that require them to commit a significant portion of their capital for long periods. These investors earn returns based on the interest payments on a portfolio of loans in the fund.

The largest players in private credit, as of last year, are:

Apollo Global Management – $480 billion assets under management (AUM).

Blackstone: $355 billion AUM.

Ares Management: $309 billion AUM.

KKR: $242 billion AUM.

Guggenheim Investments: $198 billion AUM.

The Carlyle Group: $190 billion AUM.

Neuberger Berman: $182 billion AUM.

Oaktree Capital Management: $129 billion AUM.

Brookfield: $124 billion AUM.

Some of the top public BDCs are Blue Owl Capital and Ares Capital Corporation.

3. Why investors are concerned

Private credit has seen default rates rise, and there’s concern that defaults in the software space, which private credit has significant exposure to, could really surge in the future as the sector has been hammered due to concerns about artificial intelligence (AI) being able to easily replicate its products and services, which could create significant competition and erode margins.

The big publicly traded stocks with high exposure have been hit hard over the past six months:

APO data by YCharts.

The very nature of private credit exacerbates these fears. Private credit loans are marked to market quarterly, and given the industry’s opacity and lack of regulation, the marks on these loans can vary, making it difficult for the public to understand what’s really going on.

These concerns have led more private credit investors to try and exit these funds. But remember, investing directly in private credit funds typically means tying up money for long periods.

Recently, Apollo, in a filing with the Securities and Exchange Commission (SEC), said it received redemption requests totaling over 11% of all outstanding shares in its main private credit fund. However, the fund has a 5% quarterly cap for redemption requests, and Apollo recently said it was holding firm on the 5% cap.

Some other private credit players, like Blackstone, have chosen to succumb to investor demands. Investors recently requested redemptions equal to 7.9% of the $82 billion Blackstone Private Credit Fund, and Blackstone said it will meet 100% of those requests.

Another thing to consider is that if investors truly believe in private credit, they may see better opportunities by simply owning some of these publicly traded stocks, given the significant declines.

4. Perception vs. reality

Perhaps because of the nature of private credit or the many different types of loans, it’s quite difficult to gauge how bad things are, though there are certainly reasons to be concerned.

The rating agency Fitch recently reported that defaults among U.S. corporate borrowers in private credit exceeded 9% in 2025, most of which came from companies with earnings of $25 million or less.

A report from JPMorgan Chase’s private bank also noted that defaults in companies with between $25 million and $50 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) rose more than other categories in 2025, but also estimated an average quarterly default rate of about 3.4%.

According to recent **Morgan Stanley **research, analysts expect defaults in direct lending to rise from a current rate of 5.6% to 8%. JPMorgan Chase, which has extended financing to some private credit funds, also recently marked down the collateral of some loan pools backing this financing, which could hamper the ability of these private credit funds to borrow more from the country’s largest bank or force them to post more collateral, according to CNBC.

Others might argue that sentiment is causing the stress more than anything. In February, Blue Owl sold $1.4 billion of loans in three of its private credit funds at 99.7% of par. Most of the loans sold were senior secured debt, which carries high priority in the capital stack. The loans averaged $5 million and were made to 128 companies across 27 industries, with the largest being internet software.

Bulls would also argue that, while there could be risk, it has been priced into many of these publicly traded stocks at this point.

5. Private credit does not appear to be a systemic risk

Some are worried a private credit meltdown could trigger another event like the Great Recession in 2008. However, market strategists and analysts have largely said these fears are likely overblown.

The JPMorgan private bank report noted that private credit accounts for only about 9% of total corporate borrowing. Furthermore, it states that the levels of “risky lending” in the U.S. have hovered around 20% of gross domestic product for over a decade. Private credit has stolen a share of this type of lending rather than significantly expanded it.

JPMorgan also notes that in the mid-2000s, real estate loans consumed over half of all bank lending. Today, bank loans to BDCs account for about 12.5% of bank lending.

A recent report from Goldman Sachs estimated that in the event private credit were to see a 10% default rate, which is what happened during the 2008 global financial crisis, that would likely only knock about 20 to 50 basis points (0.20% to 0.50%) off of GDP.

Of course, if you’re worried that all software stocks are doomed due to AI, that could be another story, but nobody knows exactly how that will play out.