Private Credit Under the Microscope

With so much geopolitical uncertainty, the biggest surprise this past week may be how sanguine equity markets have been. We use this lull to dive deeper into private credit, where pressure continues.

First, let me say that private credit isn’t inherently bad. Lending to companies that can’t access public markets is a noble venture. But it has become a cautionary tale for the average investor, who is increasingly the preferred target of private credit managers. The promise is high yields with low volatility… tempting, yet misleading. From the beginning, the lure was easy for us to avoid: an asset class with the credit profile of junk bonds, limited liquidity, light oversight, and high fees threw up too many red flags.

Now as increased public scrutiny pulls back the covers, we get a full picture of what “high yield and low volatility” really looks like. This is what catches our eye.

1. The credit quality is closer to junk than most investors realize

Roughly 90% of private credit loans are rated single-B or lower on a ratings-implied basis, vs about 40% in today’s high-yield bond market¹. Borrowers are typically mid-sized companies owned by private equity firms, more leveraged and operating in narrower niches than public-market borrowers. The high yields are real, but they reflect the credit profile.

2. Roughly 40% cannot cover their expenses with cash flow

Per the IMF, the share of private credit borrowers not generating enough cash to cover expenses has climbed from 25% in 2021 to about 40% today². That is one reason “payment-in-kind” loans have become so common.

3. PIK lets borrowers pay interest with more debt

Under a PIK (“payment-in-kind”) arrangement, a borrower pays interest by adding to the loan balance rather than writing a check. Some PIKs are structured at origination for fast-growing companies. The bigger issue is when a borrower switches mid-loan because it can no longer pay in cash. Distress PIK has roughly tripled since 2022³.

4. Most private credit loans lack common bond safeguards

Covenant protections have eroded. Fewer than 10% of private credit deals over $500 million now include meaningful maintenance covenants, removing a key early-warning system that gave lenders time to intervene⁴.

5. Fraud is starting to surface under light regulation

Two recent blow-ups, auto parts maker First Brands and subprime auto lender Tricolor, involved allegations that borrowers pledged the same collateral to multiple lenders. BlackRock’s HPS unit separately lent hundreds of millions against receivables that appear fake. As JPMorgan’s Jamie Dimon put it: when you see one cockroach, there are probably more.

6. The claimed “low volatility” is an illusion

Private loans don’t trade publicly and aren’t marked-to-market like a bond fund. A loan that would be down 15% if it traded daily can sit at par for months. Smooth returns on paper are not low risk; they are the absence of pricing.

7. Sector concentration is higher than in a typical bond fund

Software loans make up roughly 21% of the typical private credit portfolio, with that number rising to about 40% for the rest of Tech and Business Services⁵. A high-yield bond fund, by contrast, is usually spread across a dozen or more industries with no single sector exceeding 15%.

8. Investors may not be able to get out when they want

Most retail private credit vehicles cap quarterly redemptions at roughly 5%. Funds run by Apollo, Morgan Stanley, BlackRock, and Ares have all hit those caps in recent quarters, returning only a fraction of what investors asked for. Blue Owl went further, permanently halting redemptions on one of its funds this year.

9. Insurance companies hold nearly $1 trillion of private credit

Individual investors aren’t the only ones pressured into private credit. Life insurers, many now owned or managed by the same private equity firms running the credit funds, have built up close to $1 trillion on behalf of their annuity holders⁶.

We have seen a pattern like this before. The 1980s junk bond market followed a similar arc: high yields, low reported defaults, aggressive marketing. Default rates ran between 1% and 4% through most of the decade before climbing above 10% in 1990-91, and junk bonds posted losses that erased much of the prior decade’s gains.

We don’t know how private credit ends, but a new credit market growing rapidly in a benign environment and marketed to individuals late in the cycle is not an unfamiliar pattern. We are happy to have guided our clients clear of this asset class. It wasn’t prescient, it was just following the evidence.

1. Verdad Advisers, The Reflexivity of Credit Markets (Apr 2026).

2. International Monetary Fund, Global Financial Stability Report, Apr 2025.

3. Lincoln International, Senior Debt Quarterly Report, Q3 2025.

4. Resonanz Capital, Covenant-Lite to Covenant-void? navigating Private Credit Risk (May 28, 2025).

5. JPMorgan, Private Credit Under the Microscope – Separating Headlines from Fundamentals (Mar 12, 2026).

6. The Wall Street Journal, Insurers’ $1 Trillion Buildup in Private Credit Is Leaving Regulators in the Dust (Apr 7, 2026).