Private credit faces a reality check

The private credit market, one of the fastest-growing areas of global finance over the past decade, is starting to show signs of strain as investors take a closer look at risks in the roughly $2 trillion asset class. Long viewed as a dependable alternative to bank lending, the sector is now facing tougher questions about borrower quality, liquidity and how loans are valued.

Private credit broadly refers to loans made directly to companies by non-bank lenders, often to private-equity-backed businesses that cannot easily obtain financing from traditional banks. The market expanded quickly after the 2008 financial crisis, when tighter regulation pushed banks away from middle-market lending. Asset managers and alternative lenders stepped in to fill that gap, and the sector has since grown into a large network of investment funds, asset managers and banks.

Signs of strain are emerging

Recently there have been indications that the industry may be entering a more difficult phase of the credit cycle. One issue drawing increasing attention is the rise of payment-in-kind, or PIK, interest. Instead of paying interest in cash, some borrowers are adding the interest to their debt balance. The share of private credit loans using PIK has increased from about 5% in 2022 to roughly 11% by the end of 2025, which many analysts see as an early signal that some borrowers are beginning to feel financial pressure.

Investor sentiment has also been unsettled by redemption pressures at several large funds. Morgan Stanley recently limited withdrawals from its North Haven Private Income Fund after investors requested to redeem nearly 11% of the fund's outstanding shares. Because the fund holds mostly illiquid loans, it was only able to meet a portion of those requests under its redemption rules, highlighting the tension between investor liquidity expectations and the long-term nature of private credit investments.

Similar challenges are emerging elsewhere in the industry. Firms such as Blue Owl Capital and BlackRock have also imposed limits on withdrawals as redemption requests increased. These moves have drawn greater attention to how private credit assets are valued and have weighed on the share prices of some alternative asset managers.

Banks are also taking a more cautious stance. JPMorgan has reportedly tightened financing to certain private credit funds and reduced how much it is willing to lend against some loans, particularly those tied to software companies that could face disruption from artificial intelligence. European banks are involved as well. Deutsche Bank disclosed about $30 billion in exposure to private credit in its latest annual report, highlighting how closely the sector is now connected to the broader financial system.

A late-cycle market

Despite these warning signs, the private credit market remains relatively stable for now. Default rates are still low and many large managers maintain that their portfolios are broadly healthy. Even so, analysts increasingly describe the sector as entering a late-cycle phase, where weaker borrowers begin to show signs of strain and investors become more cautious.
The next phase for the industry may depend heavily on the broader economic environment. If growth slows or interest rates remain elevated, more companies could struggle to refinance their debts. That would test the resilience of a market that expanded rapidly during years of cheap money. For now, private credit remains an important source of financing for companies around the world, but recent developments suggest the sector's long period of smooth expansion may be giving way to a more challenging environment.

Conclusion

For now, private credit remains an important pillar of corporate financing and many large managers argue their portfolios remain fundamentally sound. Yet the developments emerging across the sector suggest the market may be entering a more demanding phase of the credit cycle. The true resilience of private credit has not yet been tested in a prolonged period of higher borrowing costs and slower economic growth. If those conditions persist, the industry that thrived in an era of abundant liquidity may soon face the challenge of proving whether its rapid expansion was built on durable foundations or on assumptions shaped by an unusually forgiving financial environment.