Private credit refers to debt financing provided by non-bank financial institutions directly to companies. Its rise was largely fueled by stricter regulatory frameworks following the Global Financial Crisis, including Dodd-Frank and Basel III, which forced traditional banks to tighten lending standards and reduce risk. This created a funding gap that non-bank lenders stepped in to fill. Private credit's growth was further accelerated by a prolonged period of low interest rates, which encouraged both institutional and retail investors to seek higher yields and illiquidity premiums available through private debt. The private credit market has grown significantly since 2007 to around $3.5tn in assets under management today, with direct lending accounting for the largest slice. The most visible flashpoint today in private credit is in non-traded Business Development Companies (BDCs), the primary vehicle through which retail investors access private credit. Recent private credit concerns have prompted a rise in retail investor redemption requests, as well as a sharp reduction in gross flows into retail private credit products in recent months. BDCs are trading at a substantial discount to their net asset value (NAV). For that matter, public BDCs itself are trading at 10-20% discounts to net asset value — levels last seen during the 2022 inflation shock and Fed rate hike cycle. The single most debated issue across market participants is private credit's heavy concentration in software companies — precisely the sector most exposed to AI disruption. 3% of the high yield bond market is software loans, versus 13% of the broadly syndicated loan market and 23% of the private credit market. For the top 10 private lenders, that number climbs to 26%. Given the roughly 20 investable industry sectors that exist, exposing 26% of a portfolio to software is excessive, especially considering that software is just a subset of the Technology, Telecom, and Media sector. Many software companies have leverage of 8 to 10 times debt to EBITDA, leaving them with very little to no free cash flow after debt service. In fact, many companies are actually burning cash on an operating basis after debt service. We believe that the most alarming disconnect between public & private markets is valuations. In Q4 2025, the median private credit software loan was marked at 99.8. This compares to a median leveraged loan software price of 99.6 in Q4 2025, but 93.8 in Q1 2026. The tails of the distribution show the larger disconnect: the bottom quartile of private credit software loans was still priced at 99, versus 94 and 80.7 for leveraged loan software names in Q4 2025 and Q1 2026 respectively. Private credit software distress is effectively non-existent at approximately 1%, versus 9.6% and 24.4% for traded leveraged loan software names in those same periods. Software multiples have deflated by 44% since 2023 and 2024, yet private credit managers continue to take an optimistic view of their current software loan valuations. Redemption gating is unlikely to stop the pressure on private credit until managers take more meaningful and more numerous software loan markdowns in the quarters ahead. But all is not gone for private credit. While the Iran conflict has generated significant uncertainty, the US economy remains relatively strong. Also, credit today is owned by a much broader swath of investors and with much less asset-liability mismatch. Banks’ exposure to BDCs and private credit today is ~0.8% compared to their nearly 20% exposure to subprime mortgages in the lead-up to the GFC. Blue Owl's Q1 2026 earnings, reported this week, reflect this nuanced picture: management addressed concerns around retail credit product redemptions, emphasizing that recent activity has been driven by a minority of investors and has been orderly, with some 90% of investors not requesting to redeem. The firm pointed to roughly $30bn of dry powder and improving risk-adjusted opportunities in the origination pipeline as potential supports to growth. Our own take is private credit is yet not a systematic risk but needs to be evaluated cautiously specially any exposure to software sector. The private credit market is currently navigating its first major test after a decade of rapid growth. While the market is experiencing significant stress—including record-high default rates and a wave of redemption freezes, we believe private credit is here to stay. Obviously there might be a churn but churn is healthy for this moment of reckoning for private credit. But learning such lessons are not always pleasant in short term.
