In recent years, private credit has enjoyed surging popularity. Over the past decade, assets under management have grown at an annualized rate of roughly 14%.1 And with good reason: Private credit has historically been associated with the potential for relatively consistent returns, healthy distributions and relatively low volatility, supported by low realized credit losses.
Today, however, the asset class is coming under greater scrutiny. Publicly traded private credit vehicles have recently sold off and redemptions across some non-traded business development companies (BDCs) have raised investor questions. Concerns are growing about underwriting discipline, liquidity terms and the potential for AI-driven disruption—particularly in software and services, where private credit has elevated exposure relative to other credit markets.
These developments deserve careful attention. But in our view, fears of a systemic crisis in private credit are overstated:
That said, the environment is shifting from one that rewarded broad exposure to one that rewards disciplined selection and a portfolio approach. Dispersion is rising fast; manager selection and diversification matter more than ever. Here, we explore why we believe systemic fears of a private credit meltdown are overstated, where risks are emerging beneath the market’s surface, and why taking a selective, diversified approach to private credit remains a strategic necessity.
While some market participants argue that private credit’s rapid expansion could pose a threat to financial-system stability, we do not believe the asset class is large enough to create systemic risk on its own. Despite exceptional growth in private credit markets, the sector as a whole—as mentioned previously—only represents about 9% of total corporate borrowing.3 In our view, private credit has largely taken market share from other forms of risky credit rather than creating an entirely new credit boom. Levels of U.S. risky credit outstanding, for example, have remained relatively steady as a share of GDP over the past decade.4
It is also important to consider the investor base, which is still primarily institutional (roughly 80%5). That matters because institutional capital is typically invested for the long-term and less redemption-sensitive, reducing the likelihood that private credit funds will experience rapid outflows or forced asset sales during periods of stress. Bank and counterparty interlinkages are also modest. Bank and nonbank lending to private credit BDCs is estimated at $410 billion to $540 billion, which, while meaningful, remains modest relative to the overall financial system. U.S. bank lending alone totals roughly $14 trillion.6
One of the most important risks now under discussion concerns the potential for AI-related disruption, especially because private credit is a large lender to software and business services (even more so when compared to other credit markets). We estimate that private credit’s exposure to software stands at roughly 21%—a figure that rises even higher when broader technology and business services are included.7
While software defaults are likely to rise over a 3- to 5-year window as AI disruption takes hold, the impact will not be uniform. The software industry is not a monolith: Many deeply embedded, usage-based, mission-critical platforms will face less replacement risk than generic, easily replicated tools or subscription-based revenue models.
This industry-wide shift deserves careful monitoring. But we do not believe it points to an imminent, broad-based credit default cycle. In our view, the transition is more likely to be a sector-led reset than the start of a macro credit event. Outcomes will vary significantly depending on the quality of the borrower and the nature of its underlying business model.
At the macro level, private credit fundamentals remain broadly stable. Our base case, which still calls for resilient (if lower) economic growth in 2026, should provide continued support for credit spreads and fundamentals. Interest coverage ratios for direct lending—which reflect a borrower’s ability to make interest payments from operating earnings or cash flow—have largely stabilized after the initial shock of 2022’s higher rates, hovering around 2.0x. EBITDA growth has remained positive across all borrower size cohorts ($25 million to $50 million EBITDA), 8 with the exception of the smallest borrowers generating less than $25 million of EBITDA.
Additionally, default rates remain broadly in line with historical norms (U.S. high yield: ~2.1%; leveraged loans ~3.2%; private credit ~2.5%).9 Micro-level stress is emerging, but it appears concentrated in smaller borrowers and selected sectors, such as auto and retail, not spread across the entire asset class.
Although the broad asset class appears fundamentally sound, investors still ought to look beneath private credit’s surface to ascertain where risks are building.
This is where manager selection becomes critical.
Even in the absence of systemic stress, the private credit market is becoming more differentiated. This year, publicly traded BDCs have come under pressure and performance dispersion has widened. In our view, that pressure does not reflect a broad-based deterioration in credit fundamentals, but it does indicate that the market that is becoming more discriminating—rewarding strong underwriting practices and diversified sector exposure while punishing weaker portfolios.
The managers and vehicles whose performance has lagged most significantly tend to share common vulnerabilities: weaker risk management, higher equity exposure, greater sensitivity to potential software disruption, or a combination of rising non-accruals (typically due to borrower distress, missed payments or an expected impairment) and dividend cuts. By contrast, non-accruals at the index level remain relatively modest, suggesting the more notable weaknesses are concentrated rather than systemic.
We expect "micro" credit cycles to widen dispersion across both issuers and managers through 2026. As yields normalize and cracks emerge in select sectors and borrower cohorts, manager selection is likely to become an even more important driver of investment outcomes.
In this environment, we believe investors should prioritize managers with proven track records, experience managing across credit cycles and a disciplined approach to underwriting (with a focus on larger companies, i.e., those with EBITDA of more than $50 million). We would also suggest that investors look for managers with diversified sector exposure, a preference for seniority in the capital structure, deep restructuring capabilities and a clear understanding of sector-specific risks (as referenced in our 2026 overview).
Recently, redemption activity across large non-traded private credit funds has drawn significant attention. We expect elevated redemption activity may continue at least through the first half of 2026, and we are monitoring developments closely.
Still, it is important to distinguish between liquidity mechanics and fundamental credit deterioration.
Private credit is an inherently illiquid asset class. As a result, fund “gates” and redemption queues are not abnormal; they are useful tools embedded in many vehicles by design. It’s imperative for managers to be able to align investors’ access to liquidity with the underlying asset pool and buffer long-term value for all. In that context, we would not automatically interpret “gating” as a signal of distress—gates are simply a feature of the vehicles’ structure.
In our view, today’s elevated redemption requests appear to be driven more by sentiment than a broad-based deterioration in market fundamentals because credit fundamentals remain resilient (as mentioned previously).
A more practical explanation also comes to mind: Some investors may simply be taking profits. After all, private credit has delivered nearly three years of meaningful outperformance versus public market equivalents and historical norms. And as yields normalize, other areas of extended credit have become more competitive on a risk-adjusted basis than they were in the immediate aftermath of the 2022 rate shock.
Although popular comparisons of the current dynamic to private real estate vehicle gating in 2022–2023 are understandable, they are imperfect. Private credit is structurally different: Investments are of shorter duration and typically benefit from a larger income buffer; some 20%–30% of private credit portfolios turn over annually. Those distinctions matter when evaluating private credit’s liquidity and resilience.
We are monitoring three factors: whether net flows turn decisively negative, whether fund liquidity reserves can absorb sustained outflows without forced asset sales, and whether redemptions begin reflecting credit concerns rather than sentiment or profit-taking. To date, none of these thresholds have been breached.
We continue to believe senior direct lending’s performance can remain resilient even in a more volatile macro environment. Elevated starting yields, seniority in the capital structure and underlying portfolio diversification may continue to provide support.
That said, future returns are likely to differ from what investors experienced during the peak of the post-2022 rate hiking windfall. In the United States, we expect direct lending yields to normalize, edging toward more historical ranges—in our base case, potentially settling in the high single digits. Yields on newly issued direct lending deals still offer a premium to public markets, but that premium has compressed meaningfully from 2023’s highs.
In other words, private credit may still offer attractive income and return potential, but the bar for manager quality and portfolio construction has risen.
Private credit remains, in our view, a compelling opportunity, but one that increasingly rewards a deliberate approach.
Recent volatility, redemption headlines and questions around concentrated exposures have increased pressure on the asset class. We believe those concerns are worth monitoring, but they do not alter the broader case for private credit as a source of potential income and diversification in sophisticated portfolios.
What has changed is the degree to which outcomes may depend on how investors access the asset class. Performance dispersion is widening, and that trend is likely to continue as credit conditions change. In this environment, investors need to focus on manager selection and taking a thoughtful approach to private credit portfolio construction.
Direct lending can continue to serve as the ballast of a private credit allocation, but “credit complements,” including asset-backed finance and opportunistic or distressed credit, are becoming increasingly important as yields normalize and stress emerges in pockets of the market.
Investors that diversify across these segments, rather than relying on any single strategy, may be positioned to manage risk and capture opportunity throughout the cycle. In our view, disciplined manager selection paired with a diversified portfolio framework may offer the clearest path forward.
If you’re interested in learning more about private credit, current opportunities and how they may fit into your financial plan, speak with your J.P. Morgan team.
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