Private Credit’s Reckoning Arrives, and the Argument Is Over Its Depth

NEW YORK — Private credit, a market that has grown to somewhere between $2 trillion and $3 trillion, is passing through its first sustained period of stress and scrutiny. The disagreement among practitioners is not about whether conditions have deteriorated. It is about what the deterioration means.

The observable pressures are three. Non-accrual rates — the share of loans on which borrowers have stopped making payments — are rising. Retail-focused business development companies, which package private lending for individual investors, are facing liquidity challenges as redemption requests meet portfolios of assets that do not trade. And software-heavy portfolios, long the sector’s favorite collateral because of their recurring revenue, face the prospect of AI-driven disruption to the businesses underwriting those revenues.

One camp reads this as a cyclical correction, and a welcome one. On that view, the asset class spent its expansion years selling what amounted to a zero-loss fantasy — a decade in which defaults were suppressed by cheap money and investors came to treat that as a structural feature. Losses returning to historically normal levels is a reset, not a rupture, and higher-quality portfolios are showing broadly resilient underlying fundamentals.

The other camp focuses on what cannot be observed. Private credit assets are not marked to a public market; they are valued by the managers who hold them, and those valuations are opaque by construction. Leverage can be layered at the fund level, the vehicle level and the borrower level, making system-wide exposure difficult to total. And the practice critics call amend-and-pretend — restructuring a struggling borrower’s terms rather than recognizing impairment — can defer the appearance of distress well past its arrival.

Those two readings are not fully reconcilable with public data, which is the core problem. In syndicated lending, a deteriorating loan shows up in a price. In private credit, it shows up when a manager decides it does. That lag is not evidence of concealment, but it does mean the sector’s reported health is a lagging indicator of its actual health, and no outside party can size the gap.

The BDC liquidity issue is the most likely near-term flashpoint, because it involves a structural mismatch rather than a credit judgment. Vehicles sold to retail investors with periodic redemption rights hold assets that require months to sell at carrying value. Redemptions that exceed available liquidity force either gating or sales into a thin market, and forced sales would generate the observable prices the sector has so far avoided.

For banks, the exposure is indirect but real. Much of private credit’s leverage is financed by bank credit facilities, which means losses that begin in a private fund can travel to a regulated balance sheet. That transmission channel is the reason regulators have begun asking about the sector despite having no direct authority over most of it.