Six Funds. $1.8 Trillion. And Investors Can't Get Their Money Back. The Private Credit Reckoning Is Here.
A quick note from Behind the Markets
Wall Street loves anything it can label "uncorrelated." That's code for: "We can lever it, fee it, and hide the risk from the public."
Private credit was the perfect product. Until the withdrawals started.
Here's the weekend read for Friday.
1) Private Credit's Liquidity Math Is Finally Getting Stress-Tested — and Retail Investors Are the Exit Liquidity
The pitch was simple: private credit gives you bond-like income with less volatility. The reality is uglier: less volatility mostly meant less honest pricing.
Here's what happened in March and April. Six of the largest private credit platforms in the world gated investor withdrawals — all within weeks of each other:
Ares Management: Investors in the $10.7 billion Ares Strategic Income Fund requested redemptions of 11.6% of shares. Ares capped withdrawals at 5%, fulfilling just 43.1% of the requested $1.2 billion — paying out roughly $525 million and locking the rest.
Apollo Global Management: The $25 billion Apollo Debt Solutions BDC received requests for 11.2% of outstanding shares — more than $1.5 billion. Capped at 5% of NAV.
BlackRock: The $26 billion HPS Corporate Lending Fund saw requests hit 9.3% of shares. Capped at 5%.
Morgan Stanley: North Haven Private Income saw investors try to exit roughly 11% of shares. Gated.
Blue Owl Capital and Cliffwater: Both restricted withdrawals from multiple private credit funds after receiving elevated requests.
When you see gates and limits at six platforms simultaneously, it's not "prudence." It's the market telling you the asset and the wrapper don't match. These funds promised quarterly or monthly liquidity while holding loans that trade by appointment — if they trade at all.
Morgan Stanley warned default rates in private credit direct lending could surge to 8%, well above the 2–2.5% historical average. Fitch puts the current overall default rate at a record 9.2%. Marathon Asset Management's CEO projected 15% defaults in software direct lending — sustained for two consecutive years. BofA's head of credit strategy called private credit "the lowest quality asset class across our leveraged finance universe."
Blackstone's BCRED posted a 0.4% loss in February — its first monthly loss in three years — after marking down loans to SaaS companies including Medallia. Comparisons to the 2008 crisis are intensifying. The sector now sits at roughly $1.8 trillion to $3 trillion depending on which boundaries you draw.
One publicly traded BDC to watch as the stress test plays out:
Company: Ares Capital Corporation (SYM: ARCC)
The largest publicly traded business development company, with $40+ billion in assets — and the most transparent window into whether private credit quality is holding or cracking.
ARCC is currently trading around $18.93 and yields approximately 10%+. Unlike the gated semi-liquid funds, ARCC trades on the public market — meaning you can always sell. That's both its advantage and its risk: if the private credit narrative worsens, ARCC's stock price absorbs the sentiment even if its underlying portfolio is better than the industry average. Watch ARCC's quarterly portfolio quality reports — non-accrual rates, sector concentration (especially software), and weighted average leverage — as the real-time barometer of private credit health.
Bottom line: If you're chasing yield, the question isn't "what's the coupon?" It's "can I get my money back when everyone else wants out?"
2) Watch the Hidden Concentration: Software Is a Giant Slice of Direct Lending — and AI Is the Wrecker
When Wall Street says "diversified private credit," you should hear: "a lot of the same risk in different wrappers."
Morgan Stanley estimates direct lending exposure to software at approximately 26%. Marathon Asset Management's Bruce Richards flagged it even higher: 23% of the direct lending marketplace in software — versus only 1% of private companies being software companies. That concentration is the entire problem.
Now pair that with what AI is doing to software incumbents.
These software companies were financed like stable, recurring-revenue cash machines — at leverage ratios of 8 to 10 times annual earnings. For context, public software companies carry approximately 0.5 turns of leverage. The broadly syndicated loan market carries about 5.2 turns. Direct lending software carries 8 to 10.
AI doesn't just create winners. It destroys pricing power for the mediocre. If a mid-market software company's moat was "our workflow is annoying to replace," AI is the replacement. And at 10x leverage, all cash flow goes to debt service. There's no free cash flow to pivot, rebuild, or invest in AI features.
Richards described the path: "extend and pretend" first… then distress… then defaults… then "massive losses." Recovery rates on bad loans: as low as $0 to $0.30 on the dollar. The maturity walls — five- and seven-year loans originated in the 2020–2022 "free money" era — hit in 2027 and 2028.
Apollo's CEO Marc Rowan warned that software at 30% of leveraged lending is "subject to attack." Blackstone marked down Medallia — a SaaS company — in its BCRED portfolio. Blue Owl is "heavily exposed" to SaaS lending.
One company positioned on the winning side of the AI disruption that's destroying software incumbents:
Company: ServiceNow (SYM: NOW)
The enterprise workflow platform with 99%+ renewal rates, mission-critical integration, and AI capabilities that enhance rather than replace its core product.
ServiceNow is currently trading around $90.82. While mediocre SaaS companies with 8–10x leverage get disrupted by AI, ServiceNow is using AI to strengthen its moat — its Now Assist suite is additive to the platform, not an existential threat from outside it. Revenue growth north of 20% year-over-year, expanding margins, and a clean balance sheet. This is the contrast that matters: the software companies dying in private credit portfolios couldn't fund innovation. NOW can. When the private credit software shakeout forces restructurings, the survivors in public markets that can self-fund AI integration gain market share from the wreckage.
Bottom line: The next credit problem can be an AI story. Not because AI is a bubble — because it's a shock to incumbents' cash flows.
3) The Trade for Retail Investors: Stop Worshiping Smooth Returns
Here's the part retail investors never get told: a product with low volatility isn't automatically safer. Sometimes it's just marked less often.
The private credit products that gated withdrawals in March and April were marketed on smooth returns, low volatility, and "uncorrelated" income. The smoothness wasn't real safety — it was quarterly pricing on assets that don't trade. When everyone wants out at the same time, the smoothness disappears and the gates go up.
If you're building a portfolio, think like a risk manager: How often is the asset priced? Who provides liquidity in a drawdown? What happens if withdrawals spike? Are you being paid enough for that risk?
After Tuesday's CPI at 3.8% and FedWatch pricing zero rate cuts in 2026, the credit math gets worse, not better. Higher-for-longer rates mean the floating-rate loans inside private credit portfolios charge borrowers more interest — which sounds good for the lender until the borrower can't pay. That's how "higher rates = higher income" flips to "higher rates = higher defaults." And with one analyst warning about rate hikes for 2027, the pressure only intensifies.
One company that generates high yield with full transparency and daily liquidity:
Company: Automatic Data Processing (SYM: ADP)
The largest U.S. payroll processor — recurring revenue from 40+ million workers, minimal debt, decades of dividend growth, and a business model that doesn't require marking assets by appointment.
ADP is currently trading around $209.41. The comparison is deliberate: private credit promises 8–10% yields on opaque, illiquid loans with 5% quarterly withdrawal gates. ADP delivers consistent returns through real cash flow, real dividend growth, and a stock you can sell any second of any trading day. In a world where "safe yield" products are gating investors and private credit defaults are hitting records, the boring public company with a transparent business model and daily liquidity becomes the genuinely safe alternative.
Bottom line: Smooth returns are not a free lunch. They're usually a hidden bill that shows up all at once.
Before You Go
Weekend question: how many "safe yield" products do you own that would have to gate redemptions if stocks dropped 15%?
If the answer is "I'm not sure," that's the warning.
Found this helpful? Share it with others.
Written by Behind the Markets