The articles note that the private credit industry is experiencing outsized withdrawals, with Blackstone, BlackRock, Cliffwater, Morgan Stanley, and Stone Ridge facing elevated withdrawals or imposing redemption caps. The articles suggest that the sell-offs stem from a combination of factors: retail investors spooked by fund liquidity issues, concerns about AI disrupting software-heavy loan portfolios, high-profile loan defaults, and rising default rates (9.2% in 2025, per Fitch).
Commonfund’s investment team has been closely following these developments and the resulting money flows out of this space. The underlying concerns being expressed around redemptions, liquidity valuations, and the high-profile defaults are topics that were front and center during many of the sessions at our recent Commonfund Forum and discussed in a recent Point-of-View podcast, "Evolving Landscape of Private Credit". Following is a summary of our perspective on the major concerns cited in the articles.
The outsized redemptions leading to fund liquidity restrictions, for many of the firms cited, are generally tied to a structural feature. These vehicles are private Business Development Companies (BDCs) or other legal structures (interval funds) that offer periodic liquidity (typically 5% per quarter) to investor bases that may include retail and high-net-worth investors. When redemption requests exceed established limits, the manager may choose to stay within the stated limit, with the remaining redemptions honored in future quarters, or the manager may meet redemption requests above the 5 percent threshold, if they have the liquidity to meet these requests. Retail investors tend to have shorter investment horizons and greater sensitivity to near term news, which can amplify the outflows beyond what underlying fundamentals appear to warrant. By contrast, closed-end drawdown structures, which are commonly used by institutional investors, do not have redemption mechanisms. This eliminates the structural liquidity mismatch that can drive sentiment driven outflows in open ended vehicles. Recently, certain opportunistic credit strategies attempted to offer a liquidity path to gated investors from some of these funds at a meaningful discount to NAV. Interestingly, the manager in question saw less interest from gated investors than anticipated. Market participants appear to be interpreting this as an indication that the stampede for the exits could be lessening or that the risk from this situation may not be systemic in nature.
There has been a lot of attention on the exposure of private credit to SaaS and software-related companies, particularly as artificial intelligence (AI) disruption has weighed on software valuations. This concern is most acute for managers with heavy concentration in upper middle market corporate loans to sponsor-backed software companies and particularly for public and private BDCs, where there can be significant borrower overlap across funds. Further, concern over these companies, particularly whether they will be able to pay off their loans, is also contributing to the higher volume of redemptions. If investors see the net asset value (NAV) of these investments being impacted by exposure to challenged loans, some may choose to head for the exits at current prices rather than wait to see what the future holds.
Portfolio construction choices can also influence exposure to the risks outlined above. Managers with a focus on lower and core middle market generally face less overlap with larger funds that tend to serve retail capital. Additionally, the opportunity set within private credit has expanded meaningfully over recent years. Portfolios with large exposures to asset-based finance, such as aviation leasing, infrastructure lending and real estate bridge lending, offer very different risk drivers than corporate lending. These segments of the market have also attracted fewer new entrants as retail-oriented capital has been largely concentrated in corporate lending. This could suggest that risk/reward dynamics are less affected by inflows, which may result in better outcomes for those investors accessing these sectors in an institutional framework.
The high-profile collapses of First Brands and Tricolor late last year rattled the market and prompted Jamie Dimon's well-publicized "cockroach" comment. Both cases were ultimately driven by fraud and poor business practices (e.g. double pledging of collateral, off-balance sheet financing, and weak governance) rather than broad market weakness. Importantly, despite being spun by the media as a private credit problem, it can be argued that these issues affected traditional bank lenders and public credit markets more so than private credit. That is, it was an investment grade issue in addition to being a non-investment grade issue.
The industry has also faced questions about the increased use of Payment-in-Kind (PIK) structures. These are loans for which borrowers compensate the lender with additional face value added to the loan balance rather than a full cash interest payment, with principal being paid at maturity. Firstly, it is important to distinguish between “good PIK” and “bad PIK”. One can characterize “good PIK” loans as those for which the manager initially underwrites the loan as a PIK at issuance to provide the borrower with growth capital. Given that the borrower is experiencing high growth and is using available cash to fund that growth, there is less available for a cash pay loan. However, the growth rate justifies paying the higher interest rate typically associated with a PIK loan. The second example, a “bad PIK’ begins life as a cash pay senior secured loan, however the borrower faces headwinds that impact its ability to pay cash interest for a period of time. In this example the borrower and lender agree to halt cash payments, and the loan is amended to a PIK loan. That is, the lender agrees to a partial or full holiday on cash interest payments in exchange for additional principal (Payment-in-Kind). The view is that once the borrower rights the ship, they may be able to resume cash interest payments. This occurred on a broad basis during the COVID dislocation, when many senior lending managers executed amendments with borrowers to convert the loans from cash pay to PIK. Once government programs took hold and markets stabilized, the expectation was that loans would revert from PIK to cash pay. While PIK usage has increased in certain pockets of the market recently, the broader default picture had generally remained contained, although one can make the argument that the increase in amendments to existing loans could be indicative of an increasing “shadow” default rate. Direct lending default rates have started to increase, as expected by market participants, and interest coverage ratios will likely decrease if the cost of debt increases or the economy experiences further headwinds.
Much has been written about loan covenants in recent years. These loan terms are typically included to protect the lender’s rights under the loan agreement. The benefit of loan covenants can include improved monitoring of the borrower and the ability to intervene in the event of problems. The monitoring component can result in a borrower reporting business outcomes more frequently than quarterly, allowing the lender to have a “seat at the table” to potentially influence outcomes and preserve or improve recoveries for their investors. Covenants in the liquid credit space have weakened in recent years, leading many to characterize loan issuance as being “covenant-lite” or possessing weaker covenant protections than in years past. In our view, covenants have tended to be more robust in private credit compared to liquid credit over time. These characteristics have resulted in improved default recovery rates for some private lenders relative to outcomes in marketable credit sectors such as high yield bonds and broadly syndicated loans. That said, covenants in larger deals where the borrower could conceivably pivot to the liquid credit market tend to have characteristics more similar to the liquid credit space in recent years.
In our view, multi-strategy private credit portfolios that blend senior direct lending, asset-based finance, and opportunistic strategy offer diversification across borrowers, geographies and collateral types, characteristics which are broadly associated with more resilient performance across cycles. More broadly, a retrenchment of retail capital from the senior direct lending sector may improve the forward opportunity set for institutional investors over time. Reduced capital availability at the margin has historically supported more attractive spreads and more stringent underwriting standards, dynamics that tend to benefit patient, long-term capital.