Wealthy investors poured trillions into private credit funds promising higher yields and manageable risk. Now they are discovering just how hard it is to get their money back.

In the first quarter of 2026, investors tried to pull more than $20bn from some of the largest private credit funds in the world. They did not get most of it back. Instead, they received letters explaining that their redemption requests had exceeded the caps built into their contracts and that they would need to wait.

The firms involved: BlackRock's HPS Investment Partners, Apollo Global Management, Ares Management, Blue Owl, Cliffwater, and Morgan Stanley collectively manage retail-facing private credit products worth over $300bn. All of which restricted outflows. It marked the most significant liquidity stress event the $3 trillion private credit industry has ever faced.1

Key figures: Redemptions attempted Q1 2026: $20bn+ · Amount returned: $11bn · US private credit default rate: 5.8% · Interval fund AUM (US): $93bn+ · Projected default rate (Morgan Stanley stress case): 8%

Flows are the forward indicator of distress both because they reflect future expectations of trouble and because they help reveal the distress.

Greg Obenshain, Verdad Advisers.2

The structure of the problem

What is a private credit interval fund?

Private credit funds lend directly to mid-sized companies that cannot access public bond markets. The loans are illiquid: there is no exchange to trade them on, and selling them requires the consent of other parties in the transaction. To attract retail and high-net-worth investors, fund managers packaged these illiquid loans inside structures called interval funds and business development companies (BDCs). These products offer periodic redemption windows with withdrawals capped at around 5% of the fund's net asset value per quarter. In good times, this tension between illiquid assets and periodic liquidity goes unnoticed. In bad times, it becomes the whole story.

The interval fund structure grew rapidly. In the US alone, interval fund assets under management quadrupled between 2020 and 2025, reaching over $93bn. A record 50 new interval funds launched in 2024.3 The growth was driven by a simple pitch: private credit offered higher yields than public bonds, with the illusion of liquidity to make it palatable to individuals and family offices.

But PIMCO's head of global alternative credit, Jason Mandinach, had been warning for months that the industry was not built for what was coming. "Direct lenders are coming out of an incredibly benign environment," he said. "Is the industry built for an extended period of net redemptions? My answer is no."4

Three fault lines that converged

Fault lineThe issueKey data point
The AI disruption of software loansSoftware companies make up an estimated 25% of private credit portfolios, representing around $500bn in loans. These businesses were favoured borrowers because of their stable recurring revenues and large margins. However, AI can replicate software functions at lower cost, but the cash flows underpinning those loans may not materialise.Morgan Stanley has warned that default rates in private credit could rise to 8%, with UBS modelling an aggressive scenario reaching 13%.
Ageing buyouts and stale valuationsPrivate credit has also been financing a backlog of private equity-backed companies that PE firms have struggled to exit. Many loans were originated in 2020–21 at optimistic valuations, with loose covenants and payment-in-kind (PIK) features that let borrowers defer interest payments by adding them to the principal. The share of PIK loans has been rising since 2022, masking underlying stress.DBRS Morningstar found that credit downgrades have been outpacing upgrades four-to-one.
The self-reinforcing panicInflows, which had previously been absorbing redemptions, fell sharply. As news of redemption gates spread, beginning with Blue Owl's cancellation of a BDC merger and BlackRock TCP's 19% NAV write down, other investors accelerated their own exit requests. Shares of Blackstone, Apollo, KKR, Ares, and Blue Owl all fell more than 20% from their 2025 peaks.Private credit fund inflows dropped more than a third in the first two months of 2026 compared to the same period a year prior.

Data caveat: Default and loss figures for private credit are self-reported by fund managers and are not standardised across the industry. The opacity of the sector — loans are generally unrated and there is no active secondary market — means real-time valuations are difficult to verify. Comparisons between managers and projections should be treated with caution.

"AI-exposed software is just the first fault line; the real risk is across any highly leveraged, rate-sensitive borrower whose business model was priced for free money."

Sunaina Sinha Haldea, Raymond James.5

What is clearer is that private credit has reached its first real test of cycle maturity. The asset class was built and sold in a decade of declining rates, abundant capital, and minimal defaults. The investors now queuing at the exit were often sold a product they did not fully understand.

What comes next

The optimistic perspective is that this is a healthy clearing event. A painful but necessary repricing that flushes out weaker loans and restores discipline to an asset class that had grown too fast, too loosely. Defaults, if they come, will be concentrated in pre-2022 vintages with looser structures, leaving more recent, tighter loans relatively unscathed.

The pessimistic view is that the opacity of private credit means the full picture is still hidden. Shadow defaults (borrowers persisting through with amended terms and PIK interest rather than formally defaulting) may be masking a larger problem. And the feedback loop between falling inflows, rising redemptions, and negative sentiment has not yet run its course.

Footnotes

  1. Financial Times, "The $20bn+ exodus from private credit," (opens in a new tab) 10 April 2026. ↩

  2. Greg Obenshain quoted in Financial Times, "Investors sought to pull $20bn from private credit funds in first quarter," (opens in a new tab) 9 April 2026. ↩

  3. Alter Domus, "Private markets pioneers: The rise of interval funds," (opens in a new tab) 6 May 2025. ↩

  4. Jason Mandinach quoted in CreditSights / LevFin Insights, "Liquidity risks loom for interval funds," (opens in a new tab) 17 July 2025. ↩

  5. Sunaina Sinha Haldea quoted in CNBC, "Private credit's 'zero-loss fantasy' is coming to an end as defaults and fund exits rise," (opens in a new tab) 25 March 2026. ↩