The Big Idea
The slow run on the bank of private credit
This material is a Marketing Communication and does not constitute Independent Investment Research.
The debt markets are watching a slow run on the bank of private credit these days even as a host of measures show steady or even improving quality for now in high yield and leveraged loans. Liquidity has become a bigger problem than fundamentals. But liquidity can turn into fundamentals if the run persists, not so much for the private debt lenders but for their borrowers. This run almost surely will require time and creativity to stop.
The list of investors trying to get out of private debt funds and business development companies continues to grow. Among the biggest reported flows:
- Apollo Debt Solutions BDC (ADS) has seen record redemption requests reaching 11.2% of outstanding shares in early 2026. Apollo has capped payouts at 5% of outstanding shares per its quarterly liquidity policy, fulfilling roughly 45% of the total money requested by investors.
- Ares Strategic Income Fund (ASIF) has limited redemptions for its $22.7 billion fund after requests reached 11.6% of outstanding shares in the first quarter.
- BlackRock’s HPS Corporate Lending Fund (HLEND) has reported roughly $1.2 billion in redemption requests for the first quarter of this year, representing approximately 9.3% of its net asset value. The fund has restricted withdrawals to its stated 5% quarterly cap, returning approximately $620 million to investors.
- Blackstone Private Credit Fund (BCRED) has received $3.7 billion in repurchase requests during the first quarter, equivalent to 7.9% of its NAV. Unlike some peers, Blackstone has fulfilled all requests by increasing its repurchase limits, supported by a $400 million investment from the sponsor and employees.
- Blue Owl Credit Income Corp has also reported record redemption requests in its non-traded BDC vehicles in early 2026.
- Cliffwater Corporate Lending Fund has seen shareholders try to withdraw at least 7% of their stake in this $33 billion fund in early 2026.
- Morgan Stanley North Haven Private Income Fund has fielded repurchase requests for 10.9% of shares. The fund capped payouts at 5%.
- Oaktree Strategic Credit Fund has allowed 8.5% of net assets to leave the $7.7 billion fund, repurchasing 6.8% of the shares with Brookfield, Oaktree’s parent company, buying 1.7% from a single investor in “a show of support” for the strategy.
It is hard to link these outflows to fundamentals. In fact, part of the problem is that current fundamentals for private credit are hard to come by. Borrowers in those markets usually provide plenty of disclosure at initial underwriting—income and balance sheet statements, customer lists, growth strategies and so on—but that information in later years often gets filtered by private equity sponsors. And there is no price signal for gauging distress. That leaves the market relying on credit in adjacent markets for clues about conditions in private debt. Most of those clues lately are stable or improving. For example:
- Rates of default and distressed exchange in the Morningstar/LSTA leveraged loan index are near their lowest rates since the Fed moved into its hiking cycle in 2023 (Exhibit 1)
Exhibit 1: Leveraged loan default rates have generally declined since mid-2025
Source: Morningstar/LSTA, Santander US Capital Markets
- The Fitch US Private Credit Default Rate in January reached 5.8%, the highest mark since its August 2024 inception, but fell in February to 5.4%
- The rate of non-accruals in the Cliffwater Direct Lending Index finished December at 1.48% of cost value—up from 1.33% in September but still below the index’s average since 2005 of 2.13%
- S&P statistics only go through the third quarter of last year, but the median reported interest rate coverage for 969 speculative grade companies in the US and Canada came in either flat to coverage in the second quarter or better
The counterargument, of course, is that these credit measures are all backward looking and include benign credit conditions. The real problem may be the future impact of AI or, lately, persistently high interest rates, which are both legitimate concerns. Add to those concerns the competition to deploy private capital in recent years and the weakening of underwriting as a result. The combination of AI, high rates and weaker underwriting is new risk. But at least when it comes to AI, the impact is particularly hard to gauge. Presumably businesses that provide mission-critical services with high switching costs should survive even an AI revolution.
That leaves liquidity. The funds limiting quarterly redemptions to 5% of AUM may have enough cash to see multiple quarters of outflows. But runs tend to reinforce themselves. Investors that wait to leave during a run often end up secured by the worst loans, with all the good and more liquid ones sold long before. The incentive is for investors to rush the doors sooner rather than later. Funds running dry on cash over the next few quarters may be able to turn to banks for subscription lines or NAV lines or to other sources for liquidity. But cash eventually runs thin.
It turns out most private debt funds are probably well equipped to survive a run. Recent work led by Gregor Matvos at Northwestern University reviewed most of the private debt fund industry. It found that most funds have equity equivalent to 65% to 80% of total assets. Debt is moderate and mainly reflects bank credit lines. And portfolios are spread across industries and geography. That does not mean limited partners get out without bumps and bruises. But private funds themselves do not look like systemic risks. As for traditional banks now lending to BDCs and private debt funds, regulators find the loan quality higher than longstanding commercial and industrial lending. Any knock-on effects at commercial banks from stress at BDCs and private debt funds looks limited.
Liquidity becomes a fundamental if it forces private funds and BDCs to preserve cash and stop lending. Then the companies relying on lending from those funds may run out of cash themselves or be forced to restructure debt or end up taking on more expensive or more restrictive loans. The biggest risk is for the borrowers in the private debt markets.
A little sunshine and transparency about the status of current and future credit in the BDC and fund portfolios facing redemptions could go a long way to stabilizing the private debt market and the broader credit markets feeling the effects. The alternative will be a buyer of last resort. But prices probably have a way to go before that buyer or buyers emerge.
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