WASHINGTON: An admired symbol of financial innovation in recent years, private credit has become a source of unease in US financial markets, and a subject of intensifying scrutiny. Leading firms have seen an acceleration of withdrawals from clients who had poured funds into non-banking financial firms as conventional banks pulled back on some vehicles after the 2008 financial crisis. In the most recent example, asset manager Blue Owl, a big player in private credit, reported redemption requests of $4.7 billion in the second quarter, only slightly less than the $5.4 billion lodged in the first quarter.
In total, these requests amount to more than half the total in one of Blue Owl’s funds dedicated to private credit. But like other firms faced with heavy withdrawal requests, Blue Owl limited withdrawals to five percent of the funds. In the first quarter of 2026, withdrawals from private credit funds overtook deposits in such funds, according to the Federal Reserve’s most recent report on financial stability. The dynamic poses risk for enterprises that have come to rely on private credit as a financing lifeline.
Alternative finance
“Traditionally, only really large companies could have” turned to private credit for capital, said professor Jared Ellias, an expert on corporate debt restructuring at Harvard Law School. “But today somebody who owns a couple of restaurants might be able to go do that,” he said. The sector grew quickly after COVID-19, from around $500 billion in 2019 to almost $1.5 trillion last year, according to the Fed. Even with that growth, the sector constitutes a relatively small share of total business debt in the massive US economy, where total corporate debt is estimated at $20 trillion, not counting the financial sector. “The private credit market grew very rapidly, it expanded from…quite a small specialized thing to something larger,” said Adam Slater, economist at Oxford Economics.
This growing population investing in private credit – including retail investors – was drawn into a space that offered less liquidity than other options, but which seemed to promise greater returns. “Because this is all bespoke lending between borrowers and lenders, our credit quality ought to be higher,” Slater said. But the situation has evolved in the last few years with the arrival of semi-liquid private credit funds, which allow investors to withdraw a fraction of their funds each quarter. Such firms have represented a growth area for the industry but today are also a source of its fragility.
Systemic risk?
One source of unease has been private credit’s disproportionate exposure to the software sector, which is considered especially vulnerable to emerging artificial intelligence technologies. “There’s a lot of fear about how nobody knows who they lent to,” Ellias said. “There’s even more fear…that they’ve lent to a lot of software companies.” The default rate among borrowers has risen above five percent and continues to rise, according to the Fed. These defaults translate into hardship for businesses and investors. But Fed officials have said they don’t view the vulnerabilities in private credit as posing broad systemic risk—a view shared by other experts.
“My assessment will be that this sector is in some trouble, but the risks to spill over are much lower than they were from, from subprime,” Slater said. “There are spillovers to banks, to insurers,” he said. These negative spillovers are “not nothing, but they are much more modest in scale, as far as we can understand.” Financial insiders expect declines in private credit to continue, with other financing vehicles emerging. In a few years, the push into this market will look like a “fad,” said one insider, its rise and fall part of the “natural process of the of the market.” – AFP