Global Alternatives Strategist
Private credit is increasingly coming under public scrutiny. A chorus of alarmist editorials have warned about bankruptcies, credit quality and the limited liquidity of semi-liquid funds.
While some concerns raised in the media are undoubtedly valid, there is a widening gap between what the headlines convey and what the underlying data show in terms of actual returns and credit quality.
Where have concerns been focused?
In private credit, as with any type of credit, the key concerns are credit quality and the potential for defaults.
Two unrelated trends have put investors on higher alert:
- Isolated bankruptcies. Over the past year, a number of large creditors defaulted on debts that included private credit alongside other financing. The suddenness was particularly jarring, as defaults came with little advance warning and private credit managers in many cases held the loans at full value. Notably, accounting fraud has been alleged in several of these cases.
- Software spillover. In February 2026, as A.I. models demonstrated improved ability to write computer code, investors began collectively re-assessing software exposures in debt as well as equity portfolios. In the so-called “SAAS-pocalypse”, many leading software-as-a-service companies saw share prices drop 20-30% in 1Q26.
Software companies have previously been considered sticky, predictable creditors. Private credit funds have varying exposure, with an average allocation of about 20%.
What is the data showing today?
Private credit funds typically report quarterly, and the latest 4Q 2025 filings are not showing a significant deterioration in either credit quality or performance. The private credit default rate is approximately 2%, consistent with recent years, and similar to high-yield bonds.
Based on aggregate industry data in the 1Q 2026 Guide to Alternatives, private credit continues to pay returns in excess of public high-yield bonds.
Some risk factors have been trending upwards since 2022, when rising interest rates pressured borrowers with higher interest payments. These include PIK (payment-in-kind), a measure of non-cash interest. However these metrics have not materially worsened in the past year, and the resumption of rate cuts last year should have relieved some of the pressure on borrowers.
A reminder on semi-liquidity
The majority of the $2 trillion of private credit is held as locked-up, long-term capital by institutional investors. Newer fund structures have allowed individuals to access the asset class more easily. About $250bn of private credit now sits in semi-liquid funds owned predominantly by individual investors.
While semi-liquid funds may sometimes allow early withdrawals, this is not guaranteed. To protect long-term investors and prevent run-on-the-bank scenarios, some funds have “gated” or limited redemptions. For more on how semi-liquid funds work, see the Principles of Alternatives.
Institutional investors are not running for the exits. The most recent survey reported in the Guide to Alternatives (p.15) showed 51% of institutional investors planning to increase allocations to private credit, and 41% aiming to maintain them.
Meanwhile, inflows to semi-liquid funds by individuals are continuing even as some investors look to pare back investments.
Portfolio planning considerations
Compared to public high yield, private credit remains compelling for long-term investors not in need of immediate liquidity.
When sizing an allocation, it is important to treat private credit as a long-term investment – even where products offer potential liquidity – since withdrawals can be limited in times of stress.
Credit quality issues and the potential for large-scale disruption of the software industry are not showing up in data today, but the potential for sector-specific challenges requires heightened diligence in manager selection and long-term portfolio planning.