Key Takeaways
- • Non-accrual loans at the 20 largest publicly traded BDCs reached a median 2.8% of loan cost in Q2 2026, up from 2% in Q1, marking the highest stress level since 2017 across the $2 trillion private credit asset class.
- • Fitch Ratings reported record private credit defaults in July 2026, while the largest listed BDCs contracted during Q2 as repayments and loan sales exceeded new commitments from managers including KKR, Blue Owl, and Apollo Global Management.
- • KKR's FS KKR Capital Group reported 7.1% of its loan portfolio classified as troubled in Q2, substantially above the sector average, though representing modest improvement from the prior quarter.
- • Software companies face particular stress, with major lenders including Blackstone and KKR marking down valuations on Medallia (Blackstone's loan valued below 50 cents on the dollar) and Ares cutting positions in Cornerstone OnDemand amid uncertainty around corporate technology spending shifts toward artificial intelligence.
- • Pressure is concentrated among companies financed in 2020-2021 at elevated valuations under near-zero interest rates, now struggling to absorb higher borrowing costs; Blackstone and KKR also took control of defaulted dental services provider Affordable Care.
Summary
The private credit sector is experiencing acute stress as troubled loan metrics reach their highest levels in nearly a decade. According to analysis of Solve data, non-accrual loans—indicating borrowers have ceased payments or face imminent default—stood at a median 2.8% of loan cost at the 20 largest publicly traded business development companies in the second quarter of 2026, a significant jump from 2% in the prior quarter. This deterioration across the $2 trillion asset class signals a material shift in credit conditions for an industry that has rapidly expanded as a core growth driver for alternative asset managers.
The stress is broad-based across leading firms. Fitch Ratings confirmed record defaults across private credit in July 2026, while PitchBook LCD data showed the largest listed BDCs contracting during Q2 as repayments and loan sales surpassed new commitments. KKR, Blue Owl, and Apollo Global Management were among managers where outflows exceeded inflows. KKR's FS KKR Capital Group disclosed that 7.1% of its loan portfolio carried troubled status during the quarter, substantially above sector averages, though the figure represented a marginal improvement from the preceding quarter.
Software represents a concentrated point of vulnerability. Blackstone's fund valued its loan to software vendor Medallia at below 50 cents on the dollar as of June 30, down from 60 cents three months prior, while Ares reduced valuations on human resources software provider Cornerstone OnDemand. Lenders face heightened uncertainty regarding whether software companies can sustain revenue growth as corporate technology budgets shift toward artificial intelligence investments. The sector deterioration is particularly acute among companies financed during 2020-2021, when near-zero rates prompted private equity firms to pursue acquisitions at inflated valuations; these borrowers now face compressed margins as funding costs have risen sharply.
Beyond software, credit stress has extended to other sectors. Blackstone and KKR assumed control of Affordable Care, a dental services provider, following its default. Despite these mounting pressures, major private credit managers have largely maintained measured public messaging. Blue Owl characterized credit metrics as healthy with problems largely isolated, while Ares emphasized that borrowers generally maintained solid interest coverage and leverage ratios. This discrepancy between loan deterioration metrics and manager commentary underscores the tension between objective credit indicators and industry positioning as allocators reassess the risk profile of the asset class.
The stress is broad-based across leading firms. Fitch Ratings confirmed record defaults across private credit in July 2026, while PitchBook LCD data showed the largest listed BDCs contracting during Q2 as repayments and loan sales surpassed new commitments. KKR, Blue Owl, and Apollo Global Management were among managers where outflows exceeded inflows. KKR's FS KKR Capital Group disclosed that 7.1% of its loan portfolio carried troubled status during the quarter, substantially above sector averages, though the figure represented a marginal improvement from the preceding quarter.
Software represents a concentrated point of vulnerability. Blackstone's fund valued its loan to software vendor Medallia at below 50 cents on the dollar as of June 30, down from 60 cents three months prior, while Ares reduced valuations on human resources software provider Cornerstone OnDemand. Lenders face heightened uncertainty regarding whether software companies can sustain revenue growth as corporate technology budgets shift toward artificial intelligence investments. The sector deterioration is particularly acute among companies financed during 2020-2021, when near-zero rates prompted private equity firms to pursue acquisitions at inflated valuations; these borrowers now face compressed margins as funding costs have risen sharply.
Beyond software, credit stress has extended to other sectors. Blackstone and KKR assumed control of Affordable Care, a dental services provider, following its default. Despite these mounting pressures, major private credit managers have largely maintained measured public messaging. Blue Owl characterized credit metrics as healthy with problems largely isolated, while Ares emphasized that borrowers generally maintained solid interest coverage and leverage ratios. This discrepancy between loan deterioration metrics and manager commentary underscores the tension between objective credit indicators and industry positioning as allocators reassess the risk profile of the asset class.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.