That retreat opened the door for asset managers such as Blackstone, Apollo, Ares, and KKR to build sprawling lending businesses. What started as a workaround has evolved into one of the fastest-growing corners of modern finance.
But growth has come with trade-offs.
Even so, the headline number comes with an important caveat — losses remain relatively contained.
In many cases, lenders have opted for flexibility over force. Rather than pushing companies into bankruptcy, private credit managers frequently extend maturities, allow payment-in-kind (PIK) interest, or restructure terms. Fitch found that most resolved cases in 2025 delivered near-par recoveries, with only modest losses in a minority of situations.
In practical terms, that means investors can’t easily exit positions if sentiment shifts.
As cited by Bloomberg, in a recent podcast, Lotfi Karoui, a multi-asset credit strategist at Pimco, stressed:
“The big lesson of all of this is that, from an investor standpoint, this is a little bit of a wake-up moment.”
The mismatch becomes especially relevant as private credit expands beyond institutional portfolios into wealth channels. Semi-liquid funds — often marketed with periodic redemption features — may promise access, but the underlying loans remain stubbornly illiquid.
For now, the system is holding. There is no immediate sign of the kind of systemic stress that defined 2008, and banks are less directly exposed to this segment. Meanwhile, a growing pool of distressed debt capital is waiting on the sidelines, ready to purchase troubled assets if conditions worsen.
Looking ahead, the key variables are familiar: interest rates, economic growth, and refinancing conditions. A prolonged period of elevated borrowing costs could push more companies toward restructuring, particularly as debt maturities stack up in 2026 and 2027.
That optimism, however, now comes with a sharper edge.
FAQ What is private credit?Private credit refers to loans made by nonbank lenders to companies, often outside traditional public debt markets. Why are defaults rising in private credit?Higher interest rates have increased borrowing costs, pressuring smaller companies with floating-rate debt. Are investors losing money from these defaults?Losses have been limited so far due to loan restructurings and high recovery rates. What is the liquidity mismatch in private credit?It refers to the gap between large asset holdings and relatively small secondary market capacity for selling those loans.
