Is Private Credit Signaling a Broader Credit Problem?

Private credit has been making headlines lately. After several years of rapid growth and steady performance, the sector has come into the market’s focus for three key reasons. First, many portfolios carry high exposure to software companies that may face disruption from artificial intelligence. Second, several rapid collapses in individual loans have raised questions about the reliability of NAV marks. Third, increased redemption pressures have led some managers to limit investor withdrawals. For example, a large private credit fund recently restricted redemptions after requests exceeded the typical five percent quarterly threshold, highlighting the liquidity mismatch inherent in the asset class¹.

These developments have prompted an important question from advisors. Could stresses in private credit spill into broader credit markets? So far, the evidence suggests the impact remains contained. We have observed some selling pressure in leveraged loans where exposure to software issuers is relatively concentrated, as reflected in the Invesco Senior Loan ETF. We have also seen moderate spread widening in both high yield and investment grade credit, though flows into public credit markets have remained largely supportive. Outside of a few sectors under pressure, overall fundamentals continue to look stable.

One reason this question matters is the growing size of the asset class. Private credit has expanded significantly over the last decade as banks retreated from portions of middle market lending and institutional investors sought higher yielding alternatives to traditional bonds. As the category has grown, so too has the scrutiny. In periods like this, where sentiment shifts quickly, markets often move toward broad generalizations. Our approach is to focus on the underlying signals that help distinguish between temporary stress and systemic deterioration.

Are Headlines Missing the Structural Strength of Private Credit?

What often gets overlooked in the current discussion are the structural features that allowed private credit to grow so significantly in the first place. These are primarily secured loans that sit ahead of equity holders in the capital structure. If private credit were truly experiencing widespread stress, the effects would likely appear first in venture capital and private equity valuations, which sit below these loans in the capital structure.

Most vehicles were also intentionally designed with limits on liquidity, reflecting the illiquid nature of the underlying assets. Redemption limits are therefore not a failure of the structure, they are a feature designed to prevent forced selling during periods of investor anxiety. In fact, even with redemption caps of roughly five percent per quarter across many non-traded vehicles, the actual dollar amount of potential outflows remains relatively modest when placed in the context of the broader market and the liquidity available to managers.

Another factor often missed in the public conversation is that private credit markets are not isolated from the rest of the financial system. Banks still hold large portfolios of commercial loans that are economically similar to many private credit exposures. If the broader credit cycle were deteriorating meaningfully, it would likely be visible across multiple parts of the lending ecosystem rather than appearing exclusively within one segment.

Is the Market Punishing the Entire Category Instead of the Lagging Managers?

This is where deeper analysis becomes essential. Looking beneath the headlines reveals a more nuanced picture. Performance across large publicly traded Business Development Companies suggests credit quality is broadly stable to improving in many portfolios. Measures such as EBITDA coverage are trending higher, payment in kind income has been declining, and nonaccrual levels have been falling for several large platforms. At the same time, some of the largest private credit vehicles continue to report new subscriptions, indicating that investor demand has not disappeared.

In our view, the most likely outcome could be an increased dispersion across managers. Lending outcomes have often depended on underwriting discipline, sector selection, and portfolio construction. As the market matures, we would expect stronger managers with resilient loan books to emerge more clearly, while weaker lenders may face higher credit losses.

For advisors, this reinforces the value of looking beyond headlines. Markets often price entire categories based on sentiment in the short term. Over longer periods, performance tends to differentiate between managers that generated durable cash flows and those that relied too heavily on favorable conditions. By combining signals from equities, credit spreads, and publicly traded lenders, we believe investors can gain earlier insight into whether stresses are cyclical noise or the early stages of a broader credit deterioration.