The private credit boom has a problem

In today’s Finshots, we tell you why everyone is suddenly worried about private credit, despite the industry booming.

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The Story

A few days ago, a company called Blue Owl Capital left billions of investors stuck when they tried to pull out their money from a $36 billion fund that it manages. While investors tried to take out over 20% of their money from this fund, Blue Owl put a cap on withdrawals at no more than 5%.

Now, you might not have heard of Blue Owl. But it has created quite a bit of chatter in financial news circles of late because it doesn’t manage the kind of funds that investors like you and I invest in. It’s a huge American alternative asset management firm that manages over $300 billion in assets now, compared to just about $50 billion in 2021. So you can see how aggressively it has expanded. And the funds we are talking about here — the ones investors are locked out of, are private credit funds managed by Blue Owl, a major player in the space.

So, what’s private credit, you ask?

Well, it’s essentially lending done by firms that are not banks and not through bonds (which are debt instruments where you borrow money from the market by promising fixed interest payments and repayment of principal later). Instead, alternative asset managers like Blue Owl pool money from large investors — pension funds, insurance companies, sovereign wealth funds, family offices, and high-net-worth individuals, into a fund. This fund is then used to lend to mid-sized companies that often struggle to access traditional financing because they’re seen as riskier than large corporations.

And this market has boomed exponentially since the 2008 financial crisis. Back then, banks gave out too many risky loans to people with low creditworthiness, often with little or no income verification, to buy homes, and at low interest rates. But when interest rates rose, these borrowers struggled to pay back, triggering defaults and a global financial crisis. That was a turning point for banks, which faced massive losses. Post-crisis rules like the Dodd-Frank Act and Basel III norms required them to hold higher capital and maintain cash-like assets for stress scenarios. This forced them to shrink lending to smaller, riskier firms, shifting focus to big corporates. US banks also dropped from about 14,000 in the 1990s to roughly half that by 2008.

This created a gap that non-bank lenders like private equity firms stepped in to fill by offering flexible, direct loans to mid-sized companies. And it only grew. To give you a sense of scale, the private credit market has grown fivefold since the 2008 crisis to somewhere near the $1.8 trillion mark globally.

But now cracks are beginning to appear in this booming market. Because it isn’t just a one-off case like Blue Owl, but multiple other alternative asset management firms including some popular names you might know like BlackRock, Ares Management, Apollo, and KKR, are also putting withdrawal limits on funds. So what’s going on?

See, private credit looks very attractive. As a large investor, you might want to diversify your investments across different kinds of financial instruments. And private credit seems perfect for that, since these managers commit billions of dollars expecting steady interest income of about 8–12%. That sounds more stable than equity markets and slightly higher than bond yields. But as you know, higher returns come with higher risk. And that’s what private credit can be — risky. Because investors are essentially lending to mid-sized firms that may still be growing, and if anything disrupts that growth, things can go from boom to bust very quickly.

And that’s precisely what seems to be happening now.

A good chunk — nearly 20%, of this private credit has been given out to mid-sized software companies. To put things in perspective, over the last decade, lending to these SaaS (software-as-a-service) companies has grown by over 60 times to a whopping $500 billion by the end of 2025.

And you know what happened as the new year began. Agentic AI tools launched by AI giants sparked fears that AI could do most of the work of building software. If that were the case, software firms wouldn’t have much left to build and AI could eat into their revenues.

This assumption did two things. One, it dragged down tech stocks, especially SaaS firms. The other was that firms like Morgan Stanley warned that default rates in private credit could rise to 8%, much higher than the usual 2–2.5%, especially in sectors like software that are vulnerable to AI disruption. This so-called AI “SaaSpocalypse”, as they call it, nudged investors to run to their fund managers to pull out their investments.

But the thing is, these funds are kind of locked in for the long term, because they are essentially loans. You, as a private credit manager, can’t simply tell a borrower, “Hey, the investor wants their money now. Repay my entire loan!”. Because this money is used by businesses for expansion and would have already been deployed.

This explains why private credit managers can’t really allow investors to withdraw all their money. For instance, out of over 200 companies that Blue Owl has lent to, more than 70% are software companies. So when investors knocked on its door, Blue Owl basically said, “We can’t suddenly give you back all your money.”

The other issue is that these private credit funds are illiquid and can’t be easily traded like stocks or bonds. Which means that if a fund manager wants to sell these loans to another investor, it can be very hard, especially now, when the revenue streams of borrowing companies are under question. Add to that geopolitical tensions, and demand in the secondary market isn’t very strong. New buyers are expecting higher discounts, but firms like Blue Owl are offering very small ones. For instance, it recently sold $1.4 billion in loans at 99.7% of their value just to return some cash to investors, though not fully.

And the fact that other investors are noticing that their investments could also be at risk is pushing them to run to their fund managers to withdraw money, creating a sort of domino effect. Which begs the question: how bad is this crisis?

Well, certain investors, especially insurance companies, could be affected because they are involved in something called leveraged buyouts (LBOs), where private equity firms acquire companies using a mix of their own money (equity) and borrowed money (debt). The debt is placed on the company being acquired, not on the private equity firm itself. The goal is to improve the company, pay down the debt using its profits, and eventually sell it for a gain.

But here’s the thing. Insurers are heavily exposed to LBO debt, and many private equity giants like Apollo and KKR — who are also private credit managers, now own insurance companies. So you have PE firms owning insurers that are exposed to loans linked to such PE deals. Which means if many of those loans go bad, it creates a conflict: the insurer could take big losses on investments tied to its own owner.

And all of this is scaring everybody in the market to believe that this could trigger another crisis very similar to 2008. Some analysts don’t agree and feel like such comparisons could be overblown. According to them, unlike the assumption that borrowers lack credibility, most private credit today is investment-grade, with only a small portion in higher-risk loans. Plus, as per Barclays private credit is less than 5% of US GDP, while real estate and equities are both above 100%. So even if something goes wrong, the scale may not be as large as in 2008.

But there’s a flip side to this too, something we haven’t told you so far. The panic in private credit didn’t start with AI. It had already begun months earlier, around September last year, when two companies ran into trouble. One was Tricolor, a lender giving car loans to risky borrowers. And the other was First Brands Group, an auto parts supplier. Both went bust. And that had consequences. Firms like JPMorgan, Fifth Third, and Jefferies, who had lent them money, had to admit that they’d taken losses on those loans. And that’s when the unease started to build.

In fact, JPMorgan Chase CEO Jamie Dimon summed it up rather bluntly: “When you see one cockroach, there’s probably more.” And the fear of these more “cockroaches” is what’s driving the panic now. So yeah, it’s not something the market can simply ignore.

That leaves us with one conclusion. A crisis may be looming. But the scale is unknown. What turn it will take, and whether fears are overblown, is something we’ll have to wait and see.

Until then…

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