Providing perspective on some of the headwinds facing the private credit market.
April 15, 2026
By Radu Dragomir, CFA, Mikhial Pasic, CFA
Investor enthusiasm for private credit has moderated alongside returns, negatively impacting fund flows. Mounting concerns about the AI-induced upheaval in the software industry and some notable non-investment-grade bankruptcies have clouded investor sentiment. The moderation in private credit returns to high single-digits in 2025 from low teens during the prior two years has been primarily driven by declines in base rates and credit spreads on new deals rather than credit losses.
While credit stress broadly appears contained so far, there are growing signs of performance dispersion—both in terms of portfolio returns and in some of the credit metrics that we monitor as a part of our due diligence process. Within the private markets generally, but also specifically within private credit, manager dispersion—the performance gap between top- and bottom-quartile managers—is wide. During periods of stress, this dispersion can widen further.
As a part of both our initial and ongoing due diligence, we are attentive to the level and trend in defaults/non-accruals, increases in payment-in-kind (PIK) income and closely track the proportion of loans at stressed prices.
The current environment reflects a liquidity squeeze, more than a systemic credit shock, in our view. Investor redemptions from private credit funds began increasing in the second half of 2025 and have climbed higher through the first quarter of 2026, in many cases resulting in net outflows and funds enforcing their redemption limits.
Redemption limits (i.e., restrictions placed by fund managers on the amount of capital that investors can withdraw during a specific period) can be uncomfortable for investors, but they are a common feature of products within the alternative asset class (which includes private credit).
Fundamentally, this restriction is in place to protect all unitholders, particularly during periods of stress given the limited market to trade the underlying investments. We believe this marks the first time many of the largest open-end structures in private credit are facing outflows—and in some cases it is the first time investment managers in the space are confronting net outflows. Managers with disciplined leverage profiles and conservative positioning are better suited to navigate the current liquidity-constrained environment and potentially capitalize on emerging opportunities, in our opinion.
We acknowledge the near-term headwinds but continue to view private credit as a useful tool for income generation. The higher yield that private credit offers, in exchange for credit and illiquidity risk, positions it to be among the highest-returning segments of the fixed income market. It is incumbent on managers to be disciplined and effectively manage these risks to ensure losses do not overwhelm the premium yield. In an AI-disrupted environment, we believe cycle-tested managers with proven risk-management processes are better positioned to succeed.
Negative sentiment can create opportunities for value-oriented investors. The sell-off in exchange-traded private credit (often referred to as listed business development companies or BDCs for short) may be overdone and potentially represents a buying opportunity for nimble investors as many of these funds trade at sizable (in excess of 20 percent) discounts to their reported net asset value (NAV).
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