While investors spent the past year watching tariff wars and oil price swings, something quieter was happening in the plumbing of American finance. Private credit — the sprawling ecosystem of non-bank lenders that now holds upward of $2 trillion in assets — was beginning to buckle.

The numbers arrived slowly, then all at once. In February, Blue Owl Capital announced a $1.4 billion asset sale to meet investor redemption demands, a move CEO Craig Packer called a “strategic transaction.” The market heard “fire sale.” Blue Owl shares have shed roughly 40% since January. By March, Morgan Stanley was honoring less than half of investor withdrawal requests from its $8 billion private credit fund, enforcing a strict 5% quarterly cap. Blackstone’s flagship $82 billion Private Credit Fund absorbed $6.5 billion in redemption requests in Q1 alone — 7.9% of the entire fund — forcing executives to inject $400 million of their own money to maintain stability.

And those are just the exits. The defaults are worse.

The Cockroach Theory

Fitch Ratings reported that private credit defaults hit 9.2% in late 2025, the worst on record. Two high-profile bankruptcies — auto parts supplier First Brands Group, which had borrowed more than $10 billion, and Tricolor Holdings — triggered the first real alarm bells. JPMorgan CEO Jamie Dimon put it bluntly last October: “When you see one cockroach, there are probably more.”

By March 2026, Allianz chief economic adviser Mohamed El-Erian was extending the metaphor. “The big question for markets and the real economy is whether we’re just dealing with cockroaches… or are these termites posing systemic risks?” He listed the bugs now in plain sight: valuation gaps, liquidity strains, poor underwriting, and fraud.

The industry’s response has been predictably defensive. Blue Owl co-CEO Marc Lipschultz fired back that “there might be a lot more cockroaches at JPMorgan.” New York Life Investments acknowledged “persistent headline risk” while insisting its own underwriting remained disciplined. This is the financial sector equivalent of “the fire is only in the other guy’s kitchen.”

What $2 Trillion Buys You

Private credit grew so fast because it filled a gap banks left open after 2008. Tighter regulations pushed traditional lenders away from risky corporate borrowers, and private equity firms, hedge funds, and specialized credit shops were happy to step in. The pitch was simple: higher yields for investors, faster capital for borrowers, fewer regulators looking over anyone’s shoulder.

That last part is the problem. Unlike banks, private credit funds don’t face the same oversight on valuations, leverage, or lending standards. Brad Lipton of the Roosevelt Institute put it plainly: “We simply don’t know where that money is going… the full extent of risks.”

BlackRock recently wrote down a loan to Infinite Commerce from par value to zero in the space of three months. That’s not a gradual deterioration. That’s a fund discovering the asset it marked at 100 cents on the dollar was worth nothing.

The Software Problem

Embedded in many private credit portfolios is a specific vulnerability that hasn’t received enough attention. Analysts estimate that 15% to 25% of holdings are tied to software companies — firms that took on high-interest floating-rate debt during the boom years. Now, with generative AI disrupting business models across the sector, Harvard Law’s Jared Ellias warns that private credit may have financed “losers” — companies whose products are being made obsolete faster than they can service their debt.

Industry data shows payment-in-kind loans, where borrowers defer cash interest payments, rose from 5% of private credit portfolios in early 2022 to 11% by late 2025. So-called “bad PIK” — loans that started with cash payments and switched to deferred terms — jumped from 2% to 6.4%. Partners Group chair Steffen Meister has said default rates could double in the coming years.

The Regulators Show Up

Banks are not insulated. Moody’s estimates $300 billion in bank lending flows directly to private credit firms. If those firms face a wave of defaults, the losses don’t stay in the shadow banking system — they walk right back onto bank balance sheets.

SEC Chair Paul Atkins has suggested the non-bank sector poses “almost no risk” to financial stability. Given what the past six months have revealed, that reads less like analysis and more like wishful thinking.

Sources