BREAKINGVIEWS-How Pivate Credit can Survive its Stress Test

By Neil Unmack

LONDON, March 25 (Reuters Breakingviews) - Wall Street’s lucrative private-credit empire is facing its first true stress test. Funds targeting wealthy individuals set up by BlackRock BLK.N, Morgan Stanley MS.N and peers are limiting withdrawals, as small-dollar backers desert a $235 billion market. The structures are built to survive a prolonged storm, but their fate will now depend on keeping a lid on rising defaults, and a floor underneath plummeting investor trust.

At issue are business development companies, the engines of the retail boom in private credit. Accessing private, lightly regulated, big-ticket investments was historically the preserve of institutional investors like insurers or pension plans. So-called nontraded BDCs proved a convenient way to open the world of bilaterally negotiated, high-yield non-bank loans to the vast hordes of the workaday wealthy.

Unlike their listed counterparts, which raise equity capital infrequently and then allow shares to be sold on the open market, nontraded BDCs provide investors access through continuous subscription offerings. Those investors can then opt to sell through periodic tender offers, with the price determined by a fund’s reckoning of its net asset value.

This has proven immensely lucrative. Blackstone’s BX.N vast BCRED fund, with $83 billion under management, is the sector leader. Last year alone, it generated $1.2 billion in fees. Given it accounts for a bit more than a third of nontraded BDCs’ net assets, that implies over $3 billion of fees for the total industry.

These vehicles’ vast size makes them key to the broader private credit apparatus, helping firms like the Steve Schwarzman-run shop to muscle aside traditional banks. Publicly-registered funds hold some $235 billion of loans, climbing to over $300 billion after factoring in private vehicles, according to RA Stanger data.

Now, this machine is faltering. Wealthy punters have steadily yanked more of their money, led by Asian retail accounts. Investor withdrawals are capped, with tender offers setting a hard maximum and a customary ceiling below that, typically at 5% of assets per quarter. The problem is that redemptions, gross of any inflows, rose throughout 2025 to a peak of 4.6% of industry-wide net asset value in the final quarter, RA Stanger data shows, and have accelerated this year.

BlackRock and Morgan Stanley were among the first to cap redemptions at their promised 5% threshold, since joined by Apollo Global Management APO.N and Ares Management ARES.N. Industry practitioners expect all managers to follow suit, although Blackstone's BCRED has so far honored all tender requests. That’s not to say a total exodus is happening: BlackRock’s HPS Corporate Lending fund drew in more money than it paid out in the first quarter, while Apollo's vehicle was roughly flat. The big question is whether wealthy investors will keep buying in, or if the balance tilts decisively to withdrawals.

There are some reassuring precedents. Before the private credit boom came another retail-investor honeypot, the non-traded real estate investment trust. Like BDCs, these were “semi-liquid,” offering limited regular redemptions. Again, Blackstone – through its BREIT vehicle – was a key player. It, and others, were hit by mass pessimism over property values as interest rates rose in 2022, ultimately capping withdrawals. The good news is that such funds mostly managed through it. The bad news is that investor inflows, on an industry-wide basis, collapsed. The equity value of nontraded REITs shrank by nearly a quarter during this period, according to RA Stanger.

Private credit bears certain advantages. Loans have set amortization schedules, meaning they naturally wind down over time. The average direct lenders’ book sees about 15% to 20% of IOUs by value repaid every year, before accounting for defaults. While most loans are five to seven years in duration, many prepay early as growing borrowers refinance to the cheaper, broadly syndicated market. Most of the time, cash coming in from this regular churn should cover a large chunk, if not all, of a BDC’s redemptions.

Of course, those repayments may dry up. During the 2008 financial crisis, they dwindled to around 12% per year, according to analysts and bankers. If so, funds may need to tap cash and liquid assets that are kept on-hand for just such a contingency. Moody’s reckons reserves of more liquid assets cover at least three quarters of outflows for most vehicles. If that’s insufficient, they may need to draw down more leverage, though regulations cap borrowing at two times their equity value. There’s still plenty of room: the average nontraded BDC is operating with debt equivalent to just 80% of investors’ funds, Moody’s reckons.

That all suggests the BDCs could weather a long exodus while honoring 5% redemptions. The problem is that, if they are paying their capital back out to shareholders, they aren’t reinvesting it to generate the yield that will attract new inflows. If a buyers’ strike drags on, the semi-liquid wrapper becomes an increasingly tricky constraint, and could ultimately lead to forced liquidations.

There is much to scare investors away for a long time. More borrowers are delinquent or falling afoul of covenants. Fitch Ratings, which tracks private companies’ credit profiles, estimated a default rate of 5.4% in February, down modestly from January but still higher than recent years. Losses may pick up as an energy shock resulting from conflict in the Gulf and disruption from artificial intelligence gather pace. RA Stanger research estimates that BDC funds on average have a 25% exposure to companies at high risk from AI, but this masks wide fund-to-fund variation between 9% and 41%. Public market prices suggest losses are inevitable. Widely traded loans to software companies have fallen from 95% of face value to 87% so far this year, per PitchBook LCD data.

Worthless defaulted loans erode a fund’s equity, making leverage limits bite harder while the collateral against which BDCs often borrow is devalued. A fund starting off with leverage equivalent to 80% of its equity value would see that figure rise to over 120% if it suffers 20% losses on its portfolio. At that point, ratings agencies may look askance, making it harder to borrow more money.

Managers argue that they foresaw AI risks and have prepared adequately. Private credit also still offers higher yields than widely traded alternatives, meaning investors may still be tempted back. Still, most industry players expect a shakeout, with vehicles overexposed to software losses or with too much leverage struggling to survive. History suggests leaner times ahead.

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Private credit redemptions are climbing rapidly

REITs have been in decline since limiting withdrawals

Widely traded loans to software companies are priced for pain