There has been a lot of news coverage concerning private credit in recent weeks, prompting a client to ask what is happening with this asset class.

What is private credit?

If you think about a company borrowing money/taking out a loan (ie: credit), you likely think first of them obtaining those funds from a bank. That is what happens most of the time.

But in some cases, if a company isn’t “bankable” (if they don’t qualify for typical credit) or if they want a quick/customized lending solution, they can turn to private credit. Private credit refers to loans outside of the public banking/debt markets that are issued by specialist investment firms (some public companies like Blackstone and Blue Owl and privately held partnerships or hedge funds) and offer tailored firms, different underwriting standards, and usually higher interest rates.

Who uses private credit?

Private credit has been growing quickly – but it is still a rather small part of the US outstanding corporate debt level (1.7% in 2003, 6% in 2023). It became much more popular post-2008 when big banks were placed under higher scrutiny and regulatory rules in the wake of the great financial crisis. In 2026, it’s anticipated that $2 trillion of assets will be held in private credit funds (pools of money taken in from investors that are lent out as these specialized loans).

In the beginning, private credit borrowers were mostly smaller to mid size businesses that may not have been able to meet traditional banking standards. However, as the capital flowing into private credit funds increased, they started to underwrite bigger and bigger loans. Some of the largest companies in the US market are now using private credit (for instance, Meta just announced a lending arrangement with Blue Owl). Even though they can easily (and cheaply) access public bond markets, private credit can offer flexible terms and structures to benefit these large multinational corporations.

Why have investors sought out private credit?

The interest rate paid on a loan is all about risk, namely to risk that the borrower won’t pay the loan back. Given the nature of these loans versus other types of loans (such as those backed by assets or those with traditional terms or well-known issuers), they bear a higher rate of interest – giving investors a higher “bang for their buck.” Of course, that higher return only materializes if the businesses can make good on their promise to repay the debt and its interest.

What’s happened in private credit this year?

2026 has not been a good year for private credit. The shares of publicly held private credit funds have fallen sharply year to date. Much of this concern has resulted from broad-based concerns of a main borrowing/customer base of private credit – software companies. As the software industry faces pressure from AI disruption fears, there is a direct fear that the software companies won’t be able to repay their private loans as agreed (as future cash flows could be drastically lower than believed). It’s important to note that none of this has played out yet – it’s all future-based concerns regarding the impact AI will have on the industry but in markets, sentiment and belief can have material impacts. This is one such case.

As these concerns mounted, investors tried to get their money out of the private credit funds in mass. This creates a whole separate issue. Private credit funds, by design, do not retain a meaningful amount of liquidity. They make money – and can pass those returns on to investors – by lending money at high interest rates, not by holding cash. As a result, when redemptions spike, these funds aren’t able to remit all the capital requested as most of their capital is tied up in long term loans. And once a fund starts to restrict redemptions in any way, investors become even more nervous, redemptions go up even higher, and it becomes a circular problem.

How will this play out?

As is the case with any pool of loans, there is always a risk that certain loans will not be repaid as agreed. In private credit, due to the nature of the loans and their terms, that risk is heightened and the higher rates of interest take that risk into account. Of course there is risk here – if there wasn’t, the rates wouldn’t be 2-3x that of US treasuries! The risk and the illiquidity are what allow for higher rates of interest – which is why investors were drawn here in the first place. Time will tell if investors end up being compensated enough for the risk they were taking. Some loans will work out better than others. Some funds will do better than others. These private credit funds expect a certain level of defaults. The accuracy of those expectations will only be known in reverse.

What’s a key takeaway?

There are a LOT of story lines blended together into the issue the media is labeling “private credit meltdown” – but a main one for investors to focus on in my view is “know what you own.”

There are many individual investors now railing against private credit since they can’t get their capital back. They either did not fully understand what they were investing in or more importantly did not understand the “by design” illiquidity feature of the investment. This isn’t the fault of the investment itself – again, by design, private credit carries higher risk, higher returns, and doesn’t retain large swaths of liquidity for redemption. It is the fault of investors and/or their advisors – either not fully understanding what they owned or not fully appreciating how illiquidity feels when you actually want to redeem and cannot.

It’s a useful reminder that you as an investor – whether you work with an advisor or not – must always know what you own, why you own it, how it works, why it offers a superior return (if applicable), and how you can get your money back. As there is increasing demand to democratize these once “institutional investor only” assets classes (like private credit, hedge funds, real estate, etc), this becomes increasingly harder to do and more important to do.

To be clear, there is a role for less-liquid investments. But that role may be completely inappropriate for some investors and their patience/risk tolerance. It’s a big investing world – find what works for you!