Bloomberg reported on Saturday that the Federal Reserve is asking major US banks for details about their exposure to private credit following a surge in redemptions from the funds and a rise in troubled loans in the industry. Investors have requested a record -$14.0 billion in redemptions from private credit funds in Q1 2026. This is up +146% from -$5.7 billion in Q4 2025 and +278% higher than the -$3.7 billion in the full year 2024. Meanwhile, just half of those requests were met, leaving ~$7.0 billion in unmet redemptions, the largest backlog on record. Our concerns have always been based on the fact that private capital experienced fast growth during the ‘cheap money’ years and remains opaque. We have not seen a true credit cycle since the recovery from the Global Financial Crisis. There are a lot of new players in private credit that haven’t been tested through cycles. In addition, underwriting standards tend to deteriorate during extended benign periods. The concerns about private credit have manifested themselves in the listed BDC stocks. These have very high allocations to private credit and, particularly, software. BDCs trade at the biggest discount to their net asset value since the covid shock as software has taken a massive hit post the AI rollouts. Many private credit managers do have significant exposure to software and technology companies, in some cases as much as 25% or 30% of their portfolios. Even US insurance companies have significant exposure to private credit. Spreads in the insurance sector widened from 85bps at the end of January to 114bps, before settling at the current level of 102bps The demand to have some form of protection, should private credit risks escalate dramatically and spill over to the broader financial sector, is clear. Hence many US banks have rolled out CDS on synthetic financial index consisting of BDCs, banks & insurance companies. Considering the scale of investments and the level of interconnectedness, the queries by Fed examiners are intended to assess the level of stress in the private credit industry and the potential for it to spill over to the wider financial system. These questions are one of the strongest signals that US regulators are working to get a handle on the scale of the strains in private credit, which has ballooned to an $1.8 trillion industry marketed first to institutional investors and increasingly now to individuals. With Fed coming to actively question exposure to private credit, we can assume that there is no smoke without fire. While the current headline news flow is all about middle east conflict, private credit pain might be the next trigger for global risk asset’s weakness.
