If the growing private credit crisias is any indication, it seems that society never learns. We only swing from one craze to the next.
Let me explain what I mean…
Ever since banks of all sizes failed us so epically in 2008, private credit markets stepped up to fill a demand for lending that the banks couldn’t (or wouldn’t) meet. These are non-traditional financing sources such as private equity firms, asset managers, business development companies (“BDCs”), and insurance providers.
Private credit is what the name suggests. It’s a form of financing made by non-bank institutions. Loans are negotiated directly between the lender and borrower to account for specific time, structure, and confidentiality concerns. This hands-on treatment tends to come with caveats, such as higher interest rates. But they’ve been sold to businesses, consumers, and investors alike as safe, high-yield, uncorrelated alternatives to traditional bonds.
That pitch worked.
By 2015, the previously minuscule market was worth $500 billion. A decade later, it had grown to $3.5 trillion.
2026 might be the year we see that astronomical growth come back to Earth, however. Because this supposedly “patient capital” is now seeing a mass exodus of investment.
Take Morgan Stanley’s North Haven Private Income Fund. It has a 5% withdrawal cap per quarter, yet investors have recently requested removing over twice that amount.
Blue Owl Capital Corporation II (OBDC II) – a retail-focused fund – froze withdrawals altogether because it got too many requests. And Cliffwater’s $33 billion Corporate Lending Fund and BlackRock’s flagship fund, BCRED, are seeing exoduses, too.
To quote Deepak Hurakadali on Substack, “Individually, you could write these off as idiosyncratic hiccups.” Collectively, though, it’s plain to see, they’re much more problematic.
Far-Reaching Effects
I’m sure the growing number of investors being locked into their positions has them frustrated. But today’s private credit crunch isn’t just about liquidity.
It’s also about reach. It’s not just big, bad Wall Street that will feel it if these institutions fall further. Many 401(k)s, pension plans, insurance portfolios, and mom-and-pop investors are invested in these assets as well.
There’s also a solvency aspect to consider, which is a much bigger domino altogether.
According to Fitch Ratings, recent default rates across the private credit market have already doubled year-over-year. Too many of these companies’ customers agreed to floating-rate debt way back in 2020 and 2021 – when interest rates were next to nothing. And they can’t afford to keep going under current conditions.
Bloomberg addressed this issue earlier this month, writing how:
The solution for 146 private companies in Europe [has been] handing the keys to their lenders, according to a recent study by Goldman Sachs Group. In debt-for-equity swaps, lenders get a company’s equity and ownership in exchange for writing off part – or sometimes all – of its outstanding loans.
Other funds are now marking loans down all the way to zero overnight. And we might very well see the situation get worse from here.
It’s important to recognize that these aren’t fringe players we’re talking about. Remember that names like Morgan Stanley, Blue Owl, Cliffwater, and BlackRock are experiencing pressure.
Take Blackstone, for example. Its executives personally put money into BCRED to show their confidence in the fund. Instead, that sparked further distrust, with investors seeing it as a desperate move.
They may be right considering how Bank of America’s March survey showed that 63% of global fund managers think the most likely systemic credit event will be related to private equity and private credit.
Not inflation. Not artificial intelligence bubbles. Not sovereign debt.
Private equity and credit.
My Way Above the Troubled Private Credit Market
I don’t blame anyone for wanting to get involved in this market. I understand the appeal. It’s been quite the trend for quite a while. Our colleague Stephen Hester recently made the case for private credit vehicles (as well as the risks) last month.
That’s why I don’t ever buy blindly into movements. I buy into strong companies with reliable cash flows in categories like real estate investment trusts (“REITs”), utilities, and core infrastructure.
Despite being punished in the rate-hike cycle, REITs hold hard assets that produce contractual and transparent cash flow. As rates stabilize and credit tightens, these companies should benefit from capital scarcity and rising replacement costs.
As for utilities, they’re the quintessential “bond proxies,” generating steady regulated returns on physical networks such as power grids, pipelines, and water systems – the kind of resources society can’t do without. Their pricing structures often adjust for inflation, offering real cash yields when credit-based “yield” evaporates.
Likewise, toll roads, transmission lines, and cell towers are assets with inelastic demand and inflation-linked cash flow. The right infrastructure plays don’t need a buoyant capital market to justify their value.
They’re necessary regardless.
Here’s another thing these assets all offer that private credit rarely does: visible balance sheets based on easy-to-understand operations. They mark their prices daily… distribute cash on a monthly or quarterly basis… and refinance in open markets.
Investors know where they stand. And they can act accordingly.
Private credit, by contrast, can hide risk behind quarterly appraisals for as long as the good times keep rolling. It can even keep hiding as the good times start slowing – right until there’s nothing left to hide behind at all.
Bottom line: Stick with quality.
The price of doing otherwise is never worth it in the end.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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