The challenging environment is not necessarily an inditement of the entire market.
April 2, 2026
By Tasneem Azim-Khan, Vice President and Chief Investment Strategist, RBC PH&N, Kwun Chung, Senior Research Analyst and Laurent Marien, Senior Portfolio Engineer
There seems to be no shortage of negative headlines regarding the private credit markets of late. Worries have been especially manifested in the stock prices of publicly traded Business Development Companies (BDCs) that offer and manage investment funds that allow access to private credit investments for retail and institutional investors. Normalizing distributions, spread tightening, AI-driven disruption in the software sector and several high-profile, non-investment-grade company bankruptcies over the last six months have driven an uptick in related fund redemptions, concurrent with slowing fund inflows. We are monitoring the situation closely and believe that redemptions will likely rise further going forward before stabilizing.
While fears related to private credit are understandable, we do not believe that the current environment reflects systemic credit deterioration, but rather a liquidity squeeze. Redemption limits (i.e. restrictions placed by fund managers on the amount of capital 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) and fundamentally in place to protect all unitholders, particularly during periods of stress.
We continue to consider private credit a long-term, core portfolio allocation. Our partners in the alternatives space acknowledge the potential for private credit to outperform traditional fixed income over the long term, balanced against the likely persistence of near-term headwinds. Managers with disciplined leverage profiles and conservative positioning are well-suited to navigate the current flare up and potentially even capitalize on emerging opportunities as spreads normalize. We believe the funds that reside on the RBC Phillips Hager & North Investment Counsel (RBC PH&N IC) platform share such attributes, and they are therefore likely well positioned to navigate this period of uncertainty.
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 and/or distress, this dispersion can widen further. Following this, manager due diligence and selection are critical for the alternative asset class. At RBC PH&N IC, we believe the curated approach to product selection on our platform through our Investment Committee, in collaboration with our partners in alternatives, supports an effective and prudent selection process. We have been in touch with our providers, and we believe they have the financial wherewithal to potentially navigate through this period of stress.
Through any market cycle, conditions will arise that work against the various sub-asset classes within the alternatives space, leading to rising redemptions and potentially gating (restrictions on investor redemptions). While such environments are no doubt uncomfortable for investors, the key is to “own the best house(s) in a bad neighbourhood.” Ultimately, private market products in general should be considered illiquid long-term investments in which clients should not trade into and out of frequently—if at all.
In today’s environment, investor sentiment toward private credit has understandably soured. Players in this space are experiencing a slowdown in fund flows concurrent with a swift inflection in redemption requests which increased meaningfully in the fourth quarter of last year, and they appear to be climbing further in the first quarter of this year. Subsequently, major players in the space have begun limiting fund withdrawals . Outflows in private credit markets today—a good portion of which is fear-based—stand in stark contrast to the robust net inflows into the category in prior years.
There are several factors that underpin this shift. Early redemption activity in private credit was in part a function of distributions normalizing to the high-single-digits from the low teens in 2023-2024 as interest rates came off the highs established in 2022 and spreads tightened (as opposed to credit losses). The shift away from the anomalous period of historically high interest rates—which were disproportionately a boon for the private credit market—reasonably resulted in a rebalancing of positions in this space as relative returns became attractive elsewhere.
Also, private credit is more exposed to software companies than other parts of the credit market, including leveraged loans and high yield bonds. Technology, which includes software, has historically had some of the lowest default rates over the past approximately 20 years, supported by high growth, recurring revenues and strong free cash flow (FCF), according to Blackstone. Software, on average, represents a fifth of private credit portfolios, according to Blackstone.
As such, the correction in publicly traded software stocks that has unfolded year-to-date has compounded investors’ anxiety that private credit loans to the software sector are primed for higher default rates and unfavourable repricing. Fears of AI disruption to the software suite specifically have seemingly led investors to paint the software space with an unflattering broad brush.
We suspect the sell-off in publicly traded software stocks is likely overdone. Software spans more than a dozen sub-verticals, and we believe there will be some companies with strong moats, and critical infrastructure or proprietary data that are difficult to replace or replicate. Put differently, while we are not discounting the risk of AI disruption to software companies, this battle is likely to play out on a multi-year horizon, with the ultimate outcome to be one of winners and losers. The former are likely embracing AI to drive an enhanced value proposition to their customers. Even for the “losers” that may rely more heavily on commoditized data or legacy technology, we believe they are subject to a range of outcomes— meaning it is not a foregone conclusion that such companies will be disintermediated in their entirety, which would not necessarily be a dire outcome for lenders.
The current environment presents a liquidity squeeze rather than a situation of credit deterioration. Private credit fundamentals are not showing serious signs of distress as they pertain to default rates, interest coverage, loan valuation and payment-in-kind (PIK) income as a proportion of total interest. Rather than an indication of broader systemic risk, credit issues appear idiosyncratic.
Still, we believe scaled and experienced lenders that have curated a portfolio of software assets diversified across a wide range of sub-verticals, and who are heavily weighted toward areas that could benefit from AI adoption or face low disruption risk, may be relatively better placed to take advantage of this non-linear transition. A “shake-out” of this nature that culminates in more disciplined capital supply coupled with a potential rebound in mergers and acquisitions (M&A) demand could help some private lenders negotiate better spreads on new deals going forward. We suspect that those private credit managers with a track record through several market cycles, disciplined underwriting practices, and low leverage could indeed come out as winners when the present noise subsides.
To be fair, the previously noted private credit fundamentals are lagging indicators, and we expect the level of redemptions to increase going forward, in tandem with investors’ fears of expanding credit losses. We continue to monitor this space carefully for further developments, but with persistent headwinds and likely more negative headlines to come, we would not be surprised if sentiment towards this sector remains weak in the short to medium term.
There are currently three private credit funds on the RBC PH&N IC investment solutions shelf: Oaktree Strategic Credit Trust (OSCT), Blue Owl Credit Income Trust (BOCIT) and Blackstone Private Credit Fund (BCRED), which are all perpetual, non-traded BDCs. It’s important to note that the fund from Blue Owl, OBDC II—which has garnered significant media attention recently—is not on our shelf.
All three of the private credit funds on the RBC PH&N IC shelf are demonstrating “credit health metrics” related to non-accrual rates, leverage and realized loss ratios that are better than or in line with the market average. During the past robust inflow period, pressure on managers to deploy capital favoured aggressive positioning and higher leverage, which typically generated stronger near-term returns. Now that this dynamic has reversed, conservative managers with less leverage and fewer credit problems in their portfolios are better positioned to ride this wave of investor distress, or even to potentially outperform. The private credit funds that reside on our platform demonstrate a conservative leverage profile, with expertise across multiple market cycles, and disciplined positioning supported by strong risk-management processes. Such attributes, we believe, should position them well to manage any potential elevated redemptions ahead.
With open-ended private market funds, which are semi-liquid vehicles, redemption limits effectively balance the interest of all unitholders. The “five percent quarterly redemption limit” is a standard industry practice designed to protect all investors by preventing forced asset sales during redemption spikes. Recent market developments have illustrated why these limits matter: thus far into the first quarter of this year we have seen gross redemptions exceed the five percent cap on some of the largest non-traded BDCs . Without such limits (or gating), fund managers would be forced to liquidate assets at unfavourable prices, damaging returns for remaining unitholders. When redemptions exceed the five percent threshold, prorating is the responsible approach that protects the interests of all unitholders.
Gating should not be viewed as a failure or scandal on the part of private credit funds. At various points in the market cycle, economic conditions will exist whereby certain asset classes will come under pressure while others are in favour. The private markets space is no different, and investors in open-ended funds should expect finite periods where redemptions are prorated. For reference, this occurred in the U.S. real estate category in 2022-2023 . Those managers that adhered to the discipline of implementing redemption limits (for example, Blackstone Real Estate Income Trust (BREIT), the world’s largest such fund and offered on our platform) during this time were ultimately proven to be more astute stewards of capital despite headwinds faced by the category during this timeframe, versus those managers that initially breached the limits and later had to reduce them.
Discussions with our partners in alternatives indicate that private credit—versus other sub-asset classes within private markets—is likely best positioned to meet investor distributions and redemptions. This is a function of the natural liquidity from regular loan maturities and refinancings. Cliffwater, a leading private credit manager, estimates that cash inflows from maturing loans, prepayments and sales have averaged approximately five to six percent of portfolios per quarter over the last three years . This source of liquidity may be adequate for managers to meet up to five percent of net-asset-value in redemptions without needing to rely on additional borrowing or asset sales.
The private credit funds on our platform maintain additional liquidity buffers through roughly 10 to 20 percent cash and tradeable loan reserves, under-levered balance sheets and significant borrowing capacity. In our view, their conservative positioning, lower leverage, focus on larger companies with senior lending positions and significant diversification position them well to be opportunistic as spreads widen and better opportunities emerge.
For investors with long-term investment horizons, this temporary period of elevated redemptions and recalibration could create an opportunity, as capital scarcity should widen yield advantages and reward disciplined managers.
We maintain that most private market alternative products offer access to potentially enhanced risk-adjusted returns through exposure that has different characteristics than—and lower correlation to—public investments. According to the Preqin Private Markets in 2030 Report published last October, global alternatives’ assets under management are expected to reach US$32 trillion by 2030 (this figure includes private equity, private credit, infrastructure, real estate, hedge funds and natural resources). A tailwind supporting this growth is expected to be increased fundraising in the wealth channel as traditional 60/40 portfolios give way to a more structural allocation to alternatives with a 50/30/20 split.
According to the report, demand for direct lending particularly, as well as other related strategies, is projected to reach US$4.5 trillion by 2030 (from US$3.5 trillion at the end of 2024), underpinned by bank disintermediation and new borrower supply.
Private markets already represent a core part of institutional portfolios, with allocations above 30 percent on average, according to Blackstone. Institutions have allocated to private credit for decades, underscoring the resilience of this asset class across market cycles. Institutional capital accounts for around 75 to 80 percent of the market, as these investors tend to consider private credit as a core, long-term allocation within portfolios, according to Blackstone. These investors typically compare private credit returns relative to public fixed income (as opposed to historical returns in the private credit space), where the former continues to offer attractive relative returns—albeit not as attractive as two to three years ago.
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