Cracks, not collapse: making sense of private credit in 2026

Private credit has been hitting the headlines for all the wrong reasons recently. Concerns are mounting that parts of the market are underperforming: the Federal Reserve’s May Financial Stability Report noted that some riskier companies — especially those reliant on private credit — are having greater difficulty servicing their debt, while Fitch Ratings reported that its tracked US private-credit default rate hit a record 6.0% in April 2026. Much of the stress is concentrated in sectors such as software-as-a-service (‘SaaS’), where more than $1.0tn in market capitalisation was wiped from software stocks in a single week in February 2026 amid fears that artificial intelligence could erode the value of SaaS providers — with knock-on implications for the private credit lenders who funded private equity buyouts across the sector over the past decade. Separately, reports that $20.8bn of redemption requests were made by investors in evergreen private credit funds in Q1 2026 have prompted concerns about liquidity, gating and fund structure.^{1, 2, 3}

These issues have been bundled together in the press, but they are fundamentally different in nature. One is a question of performance: stresses in certain assets or sectors that may have been underwritten too aggressively. The other is a question of fund structures: a fundamental mismatch between the maturity profile of the assets being invested in and the perceived promises made to investors of liquidity in evergreen funds.

While both are significant challenges, neither necessarily points, in our view, to a systemic failure of private credit as an asset class. Rest assured: the private credit industry today is nowhere near as problem-fraught or as systemically dangerous as mortgage-related loans and derivatives were in 2008. Private loan values are unlikely to free-fall, as private credit funds today have built-in caps on how much investors can redeem at one time, preventing forced liquidation.

The rise of private credit as an attractive asset class

The private credit market has exploded over the past two decades, particularly following the Global Financial Crisis, when banks retrenched from some types of lending, including leveraged finance. Fund managers, including many former bankers, saw an opportunity to fill that gap by providing capital directly to companies outside the traditional banking market.

The market is now estimated to be worth around $3.0tn — the Financial Stability Board (the ‘FSB’) puts it at $1.5–2.0tn on a narrower definition — and is forecast to reach around $5tn by 2029. The FSB has warned that deeper links among private-credit funds, banks, insurers and private equity firms could amplify stress on financial markets in a downturn, which underlines the need for vigilance even if systemic risk remains low.⁴

Publicly traded business development companies (‘BDCs’), which lend to private companies and act as a visible proxy for part of the market, are sending a cautionary signal: most listed BDCs were trading below net asset value as of March 2026, with some large names at 10–25% discounts. That suggests public investors are marking down private credit exposure faster than managers are marking down the underlying loans.

Over time, private credit has been viewed as attractive by some investors because it has offered access to contractual income, floating-rate exposure and historically strong risk-adjusted returns to date relative to public credit markets such as high-yield bonds, corporate bonds and US Treasuries.

But the success of the asset class has been in the context of historically low interest rates and an absence of any major credit downturn. In recent years, the supply of capital has likely outstripped demand in parts of the market, increasing competition for deals. In this environment, some fund managers, particularly newer entrants, may price more aggressively or with looser underwriting to win mandates.

Another byproduct of this abundance of supply has been fund managers writing ever-larger cheques and moving into areas where they may have less specialist experience. These cycles are not unusual in private markets. What we are seeing now is a natural correction in supply, demand and pricing, with lending likely to be offered on a more sensible basis: more realistic valuations, stronger structures and more robust underwriting. That should ultimately improve the risk-return profile for disciplined investors.

Listening to the nuance behind the noise

The recent press narrative has tended to bundle together software markdown risk and evergreen fund liquidity concerns into broader fears about private credit contagion. These issues bear further, separate scrutiny.

SaaSpocalypse — the end of the world?

Anxiety around AI eroding the durability of some software cashflows is understandable. Many software businesses were previously viewed by lenders as sticky, defensive and highly recurring. But it is unlikely that all SaaS providers are facing disaster, or that AI will undermine the economics of the entire sector.

The real issue is underwriting. Where lenders assumed too much durability, paid too high a valuation, or relied on historic growth assumptions that no longer hold, there may be pressure. Defaults may rise in some quarters. But private credit lenders are typically at the front of the queue for repayment, and software lending has not all been underwritten on the same assumptions.

Importantly, AI is not only private credit’s disrupter — it is also its shock absorber. While AI is pressuring the businesses of some software providers and hurting their ability to service debt, it is simultaneously creating substantial new demand for private capital to fund the construction of data centres, increase power generation and purchase semiconductor and other compute infrastructure. Goldman Sachs now expects the four largest hyperscalers to spend a combined $5.3tn on capex from fiscal 2025–2030, and Morgan Stanley estimates that private credit markets could supply more than half of the roughly $1.5tn needed for data-centre development through 2028. UBS estimates that private credit loans to fund AI data centres and project-finance deals nearly doubled in the 12 months to early 2025. These forecasts and estimates are based on external sources and are not guaranteed and could be subject to change.^{6, 7}

AI is therefore creating demand for new capital and preserving the attractive earnings-growth narrative for private loan funds, even as it disrupts parts of the existing loan book. The current environment is likely to expose these distinctions more clearly. Outcomes will increasingly be driven by sector expertise, underwriting quality and manager discipline.

Semi-liquid fund redemption calls need context

The liquidity concerns around evergreen private credit funds also need to be understood in context. Much of the recent redemption activity has come from newer retail investors in the US, where rules around marketing private markets products to individuals have been relaxed.

The numbers, while headline-grabbing, bear scrutiny. Across eight large vehicles reviewed by Reuters, Q1 2026 redemptions reached roughly $7.1bn — the highest on record in the dataset. Blackstone’s Private Credit Fund received Q2 2026 redemption requests equal to 10% of the fund’s shares, up from 7.9% in Q1. Unlike in Q1, when Blackstone met all redemption requests by raising cash from the firm’s senior executives, in Q2 2026 the firm enforced its standard 5% quarterly redemption cap. Paid-in-kind (PIK) interest payments — where borrowers pay interest by adding it to debt balances instead of making cash payments — also remained elevated in Q1 2026, though below the early-2025 peak.⁵

Some of these investors appear to have been alarmed by negative headlines around private credit and concerned about getting capital out if structures became gated. But in a semi-liquid product, redemption limits are not necessarily a sign that the underlying asset class is failing. They are a built-in protection designed to prevent forced selling and protect remaining investors from mass withdrawals.

The issue is therefore less about private credit itself, and more about the alignment between the liquidity offered to investors and the maturity profile of the underlying investments. Private credit is, by nature, an illiquid asset class. It can offer potentially attractive returns, but it cannot offer the same liquidity as public markets.

At Connection Capital, our conversations with professional investors focus heavily on appropriate structures, maturity profiles and the importance of understanding what liquidity is, and is not, being offered. A degree of scepticism around evergreen structures is healthy if it encourages investors to ask whether the product design properly reflects the nature of the underlying assets.

Lending slows, terms tighten — a natural correction

The industry may not be imploding, but it has substantially slowed. New loans made by private credit lenders fell to $44.8bn in the three months to May 2026, down roughly 40% from Q1 2026’s $74.6bn, according to PitchBook. The drop-off in lending suggests the industry is moving into a more defensive phase, with fund managers facing weaker fundraising, heavier redemption pressure, tougher questions about loan quality, and renewed competition from cheaper, more liquid syndicated bank-loan markets.

Tighter terms are another sign that the cycle has turned. Private credit lenders are raising spreads and upfront fees, limiting leverage and closing borrower-friendly loopholes as investor outflows and rising credit risk give lenders more bargaining power. For disciplined investors, this is encouraging: it signals a return to more sustainable underwriting and should improve the quality of new vintages.

Manager selection and due diligence in the spotlight

Recent events have exposed which products, sectors and distribution models were more fragile than they looked. They have also highlighted the risks created by frothy valuations and weaker underwriting in parts of the market, particularly after a long period of low interest rates and abundant capital availability.

We expect to see more repricing and restructuring, with newer market entrants and less disciplined managers more likely to take a hit. But funds run by managers with proven skills, sector focus and experience should have the potential to perform well.

Careful fund manager selection and thorough professional due diligence matter as much as ever. Those who have been established for a long time, or who have a specific focus and skillset in a particular part of the market, should be better placed to spot good opportunities, anticipate risks, understand the flows of supply and demand, maintain discipline on pricing, and stick to what they are good at.

A performance shakeout, not a systemic failure

This is private credit’s first real stress test at scale. It will separate robust managers from weaker ones and enforce a sharper distinction between well-structured funds and those that were built around more optimistic assumptions.

That is not the same as systemic risk. Private credit was, in part, developed to move some lending activity away from bank balance sheets and into the hands of professional investors and institutions better able to bear that risk. There will be performance risk. Some managers will underperform. Some investors may lose money. But that is different from a market-wide failure that threatens the financial system.

One area worth monitoring is what the Bank for International Settlements has termed “shadow borrowing” — AI-infrastructure funding arrangements that keep debt-like obligations largely outside corporate balance sheets while deepening links among hyperscalers, private credit vehicles and insurers. The risk is that losses in one corner of the AI trade could travel through opaque private credit structures and reach leveraged-finance markets, regional banks, insurers and pension funds before public markets can see where the exposures sit. Transparency and due diligence on these emerging structures will be important.

Private credit may be being repriced and differentiated, but it has not been disproved. In fact, for investors with the right manager access, due diligence and time horizon, the 2026–2028 vintages could prove particularly attractive as the recent market shakedown improves deal dynamics and tempers over-exuberant inflows.

Important note

This article is for information purposes only and does not constitute investment advice or a recommendation. It is directed at professional clients only. Alternative investments are not guaranteed and carry significant risks including illiquidity (investments should be considered as medium to long-term holds); potential concentration risk requiring careful diversification; performance variability between managers and vintages; and potential total loss of capital. Past experience and market observations are not indicative of future outcomes. Professional investors should bear in mind that they may not be protected if something goes wrong.