BREAKINGVIEWS-Private credit meets ‘show-me-the-money’ moment

By Jonathan Guilford

NEW YORK, March 5 (Reuters Breakingviews) - It's time for private credit titans to put their money where their mouths are. Blackstone BX.N, Blue Owl OWL.N, Ares Management ARES.N, KKR KKR.N and others grabbed a giant chunk of the leveraged finance market over the past decade. To help fund this growth, they created business development companies (BDCs) to raise vast sums from individual investors. As worries about shaky debts mount, those mom-and-pop backers are now fleeing. Managers could stem the panic by stepping in to buy as others leave. Hesitating risks inflaming the panic.

Now counting half a trillion dollars in assets, according to data gatherer Solve, BDCs allow direct lenders to accumulate funds without a set expiration date. These tax-advantaged shell companies, which exist to raise capital and lend it out, come in two forms. Listed versions, like $31 billion Ares Capital Corporation ARCC.O, allow investors to trade in and out at a price set by market supply and demand for the shares. Nontraded vehicles, like Blackstone's $82 billion BCRED, allow their wealthy buyers to withdraw at a fund’s stated net asset value up to a quarterly cap, usually 5%. Both types have hit problems.

The median listed BDC now trades at just 73% of its claimed worth, according to Morningstar data. Meanwhile, fleeing investors have breached ostensible withdrawal limits in private vehicles. Blue Owl, bruised by one attempt to wind down an aging fund, agreed to redeem 15% of assets in another. Behemoth BCRED on Monday reported withdrawal requests equivalent to 7.9% of its shares. Other rival funds have exceeded the typical 5% limit recently.

The first shock came from software — specifically, fears that artificial intelligence could replace a swathe of existing borrowers' products. That would be no small thing for private credit: Barclays pegs the average BDC’s software exposure at about 20%. Since these are asset-light businesses, lenders risk getting very little of value in future bankruptcies.

Gaming out the pain of any defaults is crucial. The average listed BDC magnifies its firepower by raising slightly more than a dollar of debt for every dollar contributed by individual investors. If default rates reach 10% and recovery rates fall to 50%, a worst-case scenario envisioned by Oppenheimer analysts for first-lien debt, a fund with $1 billion of investments would lose $50 million in principal. Typical leverage would magnify the hit twice over, wiping out a tenth of the fund investors' net asset value.

Broader problems transcend software, and date back to a wildly exuberant period of dealmaking following the pandemic. Fitch Ratings' recorded private credit defaults are led by healthcare providers and consumer products. FS KKR Capital FSK.N, a listed BDC with $13 billion of investments as of December, recently said that some borrowers in insurance claims management, veterinary services and dentistry had stopped making payments. BlackRock TCP Capital TCPC.O stumbled on loans to firms that buy up sellers of goods on Amazon.com.

And while technical defaults across private credit are subdued, at just 3.2% at the end of 2025 according to Lincoln Financial, the share of loans that switched from paying interest in cash to non-cash rocketed to 6.4%. Meanwhile, managers of unlisted BDCs face a particularly tricky task: convincing investors to hold onto shares at the fund's own stated net asset value, even as listed vehicles with similar investments suffer giant discounts.

The panic among typically flighty retail investors is therefore unsurprising. How these vehicles manage the turbulence is paramount. Nontraded BDCs must keep enough liquidity to honor some withdrawals. BCRED's $8 billion of available firepower at the end of last year could absorb roughly three quarters of redemptions if they remain at recent, extraordinary levels.

Another issue is how to refinance maturing leverage, referring to the borrowings that the funds themselves have taken on. There are three pools to tap for this debt: so-called revolving loans from banks, massive debt vehicles known as collateralized loan obligations (CLOs), or the bond market. The complication is orchestrating them in concert.

Banks require BDCs to pledge portfolio assets as collateral, which can be problematic if the underlying pool of loans is being marked down. Nor is issuing unsecured bonds easy. Fitch in February pegged $12.7 billion of BDC maturities that must be refinanced this year. Blackstone’s listed Secured Lending Fund, BXSL, BXSL.N recently had to pay half a percentage point above its prior issuance, Bloomberg reported. Under-pressure funds may face an even larger refinancing penalty. The yield on outstanding bonds issued by FS KKR, maturing in 2031, has shot up by a full percentage point in 2026.

That leaves CLOs as arguably the most promising route. Pricing is paramount. BDCs are a spread business, meaning that their profit is determined by the gap between the cost of their own debt and the yield on loans they make. If one side goes up without the other also rising, it will hurt.

There is a more extreme option to raise cash: selling parts of the loan book, as Blue Owl and New Mountain Capital have done. Regulations make it tricky for managers to sell assets to other vehicles they run. And the underlying borrowers, usually owned by buyout barons, often have a say over whether this can happen. Few industry insiders see this as a large-scale fix.

That's why it may fall to the managers themselves to cough up fresh cash, just as Blackstone did in a small way when senior leaders and the firm itself invested this week in BCRED. After all, for all the talk of problems, software companies' revenues are growing and BDC default rates are fairly low. Listed vehicles have traded at even wider discounts in the past and snapped back. Private credit barons who frequently dismiss naysayers now have the opportunity to buy their own loans at 73 cents on the dollar.

Some have announced buybacks or expanded programs, like Blue Owl, whose listed vehicles upped repurchases to $300 million from $200 million. Anyone refusing to do likewise would seem to signal weakness. Liquidity constraints may prove an obstacle. But some of the biggest asset managers in the world like Blackstone, BlackRock BLK.N and KKR have hundreds of billions of credit dry powder they could put to work. Add it to a show of force, say by arranging a massive unsecured bond placement with blue-chip institutional investors, and it might help cut the doom loop. If nothing else, it would live up to the industry’s years of bravado.

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