Key Takeaways
- • Several brokerages warn the U.S. private credit industry faces higher borrower defaults, with analysts expecting growth to moderate as AI disruption hits software companies, a major share of private credit portfolios.
- • Blue Owl capped withdrawals from two of its retail-focused funds, sending its shares down as much as 8.6% to a record low; Apollo, Blackstone, Ares, KKR and Carlyle fell between 3.6% and 5.5% intraday before paring losses.
- • Apollo, Blackstone, Ares, KKR and Carlyle have collectively lost $132 billion of market value so far this year, according to Reuters calculations.
- • Morgan Stanley expects annual private credit defaults of 8% from the second half of 2026 through the first half of 2027, led by software stress; Barclays warns default probability rises as software concentration risk grows.
- • Private credit accounted for about 30% of the U.S. leveraged finance market in 2025, up from 13% a decade earlier, per Morgan Stanley, raising the stakes of the stress.
Summary
The U.S. private credit industry faces a potential rise in borrower defaults, several brokerages warned, exposing cracks in a segment that had become one of Wall Street's favored trades. Analysts do not expect the recent stress to trigger a systemic crisis, but they anticipate slower growth as AI-driven disruption weighs on software companies, which make up a major portion of private credit portfolios.
The latest pressure followed Blue Owl's decision to cap the amount investors can withdraw from two of its retail-focused funds. Blue Owl shares fell as much as 8.6% to a record low. Other alternative asset managers, including Apollo Global, Blackstone, Ares Management, KKR and Carlyle Group, dropped between 3.6% and 5.5% earlier in the session. All of them pared losses as broader markets rebounded on renewed hopes of a reopening of the Strait of Hormuz. Even so, Reuters calculations show these firms have collectively lost $132 billion in market value so far this year.
Private credit, marketed as a less volatile alternative to publicly traded corporate bonds, grew rapidly after banks pulled back from riskier lending following the global financial crisis. Firms typically raise capital from wealthy individuals and institutions through semi-liquid funds that offer periodic redemptions while investing in harder-to-sell assets such as buyout stakes and direct loans. Strong demand for diversification also pushed managers to tap retail investors. The industry is a key lender to small and middle-market companies that traditional lenders consider too risky. According to Morgan Stanley, private credit made up about 30% of the U.S. leveraged finance market in 2025, up from 13% a decade earlier. Concerns about credit quality began to surface over the last few months, triggered by the bankruptcy of auto-parts supplier First Brands. A decline in software valuations, driven by fears of AI disruption, has further exposed the industry's concentration in that sector.
Barclays analysts warned that many private credit funds have become heavily concentrated in a handful of sectors, particularly software, and that as the risk of software companies becoming obsolete rises, so does the probability of default. Morgan Stanley expects annual private credit defaults of 8% between the second half of 2026 and the first half of next year, led by software stress. The wave of redemption curbs could intensify scrutiny of similar vehicles and raise questions about valuation, transparency and liquidity risk.
Some market participants have flagged the risk of broader systemic stress, but Federal Reserve Chair Jerome Powell said earlier this week that the central bank has not seen anything threatening the financial system as a whole. Morgan Stanley analysts said, "Systemic risks remain low, banks are well insulated, and institutional investor demand is likely to be stable." Still, valuation pressure could persist. Morningstar said most traditional and alternative asset managers it tracks trade below fair value, with some at discounts as high as 15%.
The latest pressure followed Blue Owl's decision to cap the amount investors can withdraw from two of its retail-focused funds. Blue Owl shares fell as much as 8.6% to a record low. Other alternative asset managers, including Apollo Global, Blackstone, Ares Management, KKR and Carlyle Group, dropped between 3.6% and 5.5% earlier in the session. All of them pared losses as broader markets rebounded on renewed hopes of a reopening of the Strait of Hormuz. Even so, Reuters calculations show these firms have collectively lost $132 billion in market value so far this year.
Private credit, marketed as a less volatile alternative to publicly traded corporate bonds, grew rapidly after banks pulled back from riskier lending following the global financial crisis. Firms typically raise capital from wealthy individuals and institutions through semi-liquid funds that offer periodic redemptions while investing in harder-to-sell assets such as buyout stakes and direct loans. Strong demand for diversification also pushed managers to tap retail investors. The industry is a key lender to small and middle-market companies that traditional lenders consider too risky. According to Morgan Stanley, private credit made up about 30% of the U.S. leveraged finance market in 2025, up from 13% a decade earlier. Concerns about credit quality began to surface over the last few months, triggered by the bankruptcy of auto-parts supplier First Brands. A decline in software valuations, driven by fears of AI disruption, has further exposed the industry's concentration in that sector.
Barclays analysts warned that many private credit funds have become heavily concentrated in a handful of sectors, particularly software, and that as the risk of software companies becoming obsolete rises, so does the probability of default. Morgan Stanley expects annual private credit defaults of 8% between the second half of 2026 and the first half of next year, led by software stress. The wave of redemption curbs could intensify scrutiny of similar vehicles and raise questions about valuation, transparency and liquidity risk.
Some market participants have flagged the risk of broader systemic stress, but Federal Reserve Chair Jerome Powell said earlier this week that the central bank has not seen anything threatening the financial system as a whole. Morgan Stanley analysts said, "Systemic risks remain low, banks are well insulated, and institutional investor demand is likely to be stable." Still, valuation pressure could persist. Morningstar said most traditional and alternative asset managers it tracks trade below fair value, with some at discounts as high as 15%.
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