Wall Street fears a crisis in the private credit market. Who will profit from it?

Fears are growing on Wall Street about a potential crisis in the private credit market. Investment firm PIMCO believes the roughly $2 trillion sector is in for a stress test. But a crisis for some is an opportunity for others. Independent analyst Mikhail Zavaraev discusses who can capitalize on the problems of the private lending sector.

One of the unexpected results of the rapid development of artificial intelligence in recent months has been a sell-off in the shares of funds that manage institutional assets.

Their quotations since the beginning of the year have lost from 21%, as in the case of Carlyle, to 43%, as in the case of Blue Owl. This sell-off is explained by the fact that the share of assets attributable to software developers in some funds exceeds 30%. This is quite significant, especially if you rely on the now very popular narrative that AI can replace software developers, if not today, then tomorrow.

In addition, what these companies have in common is that they are all associated with investments in the private lending segment.

In February, the market saw a sell-off in the shares of companies operating in the software market - the very "software apocalypse". And it, in turn, led to the fact that investors began to wonder about the financial stability of software developers. And they made the most logical decision in this situation - to withdraw their money from private lending funds.

But the funds are simply unable to return all the money at once because the funds are invested in low-liquid assets. To protect against such situations, they are structured in such a way that they can legitimately not satisfy all incoming requests over a certain limit. Many funds have a "withdrawal ceiling" of 5% per quarter. It is up to the funds to decide whether to refund more if this limit is exceeded.

Naturally, as soon as news headlines appeared that a particular fund had failed to meet all withdrawal requests received, there were many times more people willing to take the money, because this is a "clear" sign of problems in the industry.

Panic in the markets, especially when accompanied by headlines, only triggers a self-sustaining process that can push funds into having to sell at serious discounts the underlying assets - these are loans to non-public companies. In addition, an increase in withdrawal requests can lead to liquidity shortages, etc.

As a result, even if there were no very serious problems in the industry (which there have not been so far), the process of withdrawal of funds from private lending funds, which has started and is growing in volume, threatens to collapse the industry. That is, these very problems may appear rather quickly, as they have done many times in the history of financial markets.

Not surprisingly, the largest U.S. public investment funds (BDCs) are currently trading at a very serious discount to the value of their assets. In mid-March, Reuters cited such data - the average ratio was 78 cents for every dollar of assets. Some, like Prospect Capital Corporation, had a mid-March discount of more than 50%. In early 2026, they were trading at a ratio of 85 cents for every dollar of assets, and there was no discount in early 2025, according to Morningstar, a research firm.

Private lending is loans from non-banking organizations that lend to companies that, for various reasons, do not have access to the public debt market.

Usually borrowers are representatives of small and medium-sized companies with not the highest credit ratings or even no credit ratings at all. However, this does not automatically indicate that their business quality and ability to repay the borrowed funds is low. Moreover, the funds that provide these loans are quite successful in maintaining a relatively high quality of their portfolios both through a comprehensive analysis of the creditworthiness of potential borrowers and through diversification of loan portfolios. These loans do not have an active secondary market, although in the current situation this is rather a plus.

As a result, investors in such private credit funds receive higher returns in exchange for higher risks. But mostly these investors are professional market participants: pension funds, insurance companies, family offices, etc. And they are fully aware of these risks and can diversify and/or hedge them themselves. Moreover, investors are often still able to bear certain losses without serious damage to the financial system as a whole.

The private credit market has been growing very rapidly over the last decade, also due to relatively long periods of zero interest rates in developed economies, which automatically led to a hunt for higher rates in fixed income markets.

In the U.S. alone, the private credit market has grown from $500 billion to $1.7 trillion over the past 10 years (up to and including the end of 2025), which corresponds to an average annual growth rate of about 13% per year. By comparison, US bank assets grew at an average annual rate of only 5% over the same period of time.

Not surprisingly, the segment's rapid asset growth and withdrawal restrictions are indicative of certain problems in the private credit sector and inevitably lead to comparisons of the current situation from the recent past.

All of this brings back memories, above all, of the subprime mortgage bubble that led to one of the worst financial crises in history. Especially since the volume of loans is quite comparable, and the not entirely transparent process of assessing their real value in both cases may suggest that the two situations look suspiciously similar.

The news that JPMorgan has limited loan originations in the segment due to losses, and BlackRock has completely written off one of its $25 million private loans and is preparing to reduce the asset value of its private lending fund by 19% only confirms this.

But the comparison here is hardly justified. The private lending market has a much smaller financial leverage, minimal linkage to derivatives markets (in 2007, the market of mortgage credit default swaps alone was estimated at $62 trillion), serious restrictions on simple withdrawals from funds, low liquidity, etc. All of this significantly reduces the potential for negative impact of the sector's problems on the economy as a whole. All these considerably reduce the potential for negative impact of problems in the sector on the economy as a whole.

Not surprisingly, Goldman Sachs estimates the impact of the crisis on the private credit market at 0.2-0.5% of GDP, even in the worst-case scenario, compared to the 4% GDP losses that resulted from the collapse of the mortgage bubble. The most negative scenario from Goldman Sachs assumes an increase in loan delinquencies to 10%.

If delinquencies rise to 3-4%, the impact on GDP would be only 0.1%.

The current delinquency rate is only 1.2%, while the default rate is 1.45%. Both figures are noticeably below their 10-year averages, which are at 1.9% and 2.8%, respectively.

Another indicator of the financial health of the private credit segment is the share of interest payments in kind (non-cash assets such as goods, services or additional securities are used instead of cash). Although it has increased slightly in recent months, it still remains markedly below the levels observed in 2020, 2022 and 2024.

Not surprisingly, in such an environment, discounts on the sale of the underlying assets are quite low. In February of this year, Blue Owl, which is regularly in the news for excessive requests for withdrawals from its funds, reported that it sold $1.4 billion of its private loans to institutional investors at 99.7% of par. Such a small discount is certainly not a sign of a deep crisis in the industry, at least for the time being.

This does not mean that all is well in this segment, but the level of real stress is clearly not as serious as one might assume based on the current news background. Nevertheless, the financial sector is a priori very sensitive to negative information background. After all, its foundation - investor confidence - suffers because of it.

Such a situation may further lead to liquidity shortages and forced sell-offs of assets at more significant discounts. And it is very likely to be accompanied by deterioration of the quality of the underlying assets. In case of realization of this scenario, we are inevitably waiting for further sell-offs of shares of management companies and continuation of active withdrawal of funds from private lending funds.

It's also important to keep an eye on whether AI can really begin to disrupt the business of software companies in any serious way. So far, this has not been the case - software developers' financial results for the fourth quarter of 2025 were pretty good.

In a crisis, those who have free cash always win. Undoubtedly, institutional investors will participate in the sell-off of the underlying assets, if it happens.

In such conditions, we are likely to see consolidation of the industry, when the segment leaders with a good financial position and the ability to attract funding, even in the current environment, will be able to profit at the expense of weaker competitors. These include, for example, Blackstone and Apollo.

Moody's believes Wall Street banks will also have a "welcome opportunity to regain market share" from private credit funds. They lost market share after the Fed raised interest rates and the 2023 banking crisis. Banks then tightened their requirements for borrowers and reduced participation in riskier deals. But now bank regulation has been relaxed, which will primarily benefit the largest U.S. banks, such as JPMorgan and Citigroup. This has come in handy, especially given the recent expected decline in interest rates.

For private investors, you may consider buying shares of management companies whose quotations have significantly sagged.

Yes, it is worth being selective and focusing on quality players (and not those whose prices have fallen the most), because the probability of further sales is clearly not zero. For example, on BlackRock and Apollo Global Management.

But the first purchases (for a quarter or a third of the desired position) of industry leaders, I think you can start making now.

Does not constitute an investment recommendation.

This article was AI-translated and verified by a human editor