Why private credit is facing a sudden investor exodus

[NEW YORK] SaaSpocalypse. Credit defaults. The war in Iran. A lot of worries are hitting the US$1.8 trillion private credit market at the same time, setting off a scramble by some investors to withdraw money from the industry’s giants. In recent weeks, funds managed by firms such as Apollo Global Management, BlackRock and Ares Management have faced unprecedented requests for redemptions – and, in many cases, have exercised their right to block investors from getting all their money out.

Here’s a guide to what’s happening in the private credit market and why it’s rattling nerves on Wall Street.

What is private credit? 

“Private credit” doesn’t have one set definition. It’s an umbrella term referring to a handful of debt investment strategies. It’s “private” because unlike traded forms of debt, where banks are typically involved in arranging the transactions, the details are often invisible to anyone not connected to the deals. 

Most of the funds facing redemption requests are actually in a subset of private credit known as direct lending, where investment firms lend money to riskier, typically privately owned companies. Investors are attracted to these deals because they offer high yields, in exchange for taking on more risk. 

Why are we hearing so much lately about private credit? 

Jitters first began in the latter half of 2025. Big blowups at privately owned companies First Brands Group and Tricolor Holdings, while only tangentially related to private credit, spooked investors in general about the credit sector and what other problems could be lurking beneath the surface.

Meanwhile, private credit’s outsized exposure to software companies, which up until recently had been considered a relatively safe and lucrative bet, also began to cause concern. Investors are worried that these businesses will lose revenue as customers turn to cheaper artificial intelligence (AI)-based services. While there is little sign of that happening so far, many investors want out now. 

Fears boiled over in November when Blue Owl Capital, a prominent private credit lender that has bet big on software firms, called off a merger of two of its funds amid scrutiny over potential investor losses. Redemption requests in the final months of 2025 climbed, and funds began to brace themselves for the possibility of imposing withdrawal limits in early 2026.

In January, a Blue Owl fund allowed investors to pull out about 15 per cent of assets, and ultimately the firm sold US$1.4 billion of investments across three funds. A number of other funds managed by private credit giants such as Apollo, BlackRock, Ares, Blackstone and Oaktree Capital Management have faced similar demands, and some have exercised their right to cap withdrawals while others have found ways to meet the requests.

Add in fears over the conflict in the Middle East and general geopolitical instability, and some investors just don’t want to be exposed to higher-risk lending.

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How did private credit become so popular? 

Private credit has existed in various forms for decades, but the sector saw significant growth following the 2008 financial crisis as banks stepped back from lending. Many investment firms saw an opportunity to either establish or grow their credit business, especially private equity firms that wanted to broaden their remit into becoming alternative asset managers. 

Private credit firms grew quickly by raising most of their money from big institutions such as pensions and sovereign wealth funds. A key benefit is that these institutions are willing to lock up cash for long periods. That is an important feature for private credit lenders, who make loans for years at a time that can’t be easily traded. 

As the industry matured, private credit firms turned to retail investors as a way to keep driving growth.

How do retail investors get involved? 

For decades, ordinary investors could already invest in private credit through business development companies (BDCs), a type of fund meant to drive capital to small and medium-size businesses that might otherwise not have access to credit. These funds are typically traded on stock exchanges, and don’t have the dynamic of facing inflows and outflows. 

Then, in recent years, firms such as Blackstone, Apollo and Ares pioneered the expansion into what are called non-traded BDCs and targeted wealthy individual investors. These vehicles typically allow investors to buy into the fund on a monthly basis, but only redeem shares quarterly and limit withdrawals to 5 per cent of the value of the fund, though there is some wiggle room to go up to 7 per cent. These are the funds being hit with redemption requests, often well above the cap. (In addition, there are also interval funds that function in a similar manner, and a major one managed by Cliffwater has also been affected.)

Why are private credit funds capping withdrawals? 

In theory, limiting withdrawals helps keep private credit funds stable. Private credit loans are illiquid and cannot be easily traded. That means if many investors wanted to get out of a fund at one time, it could create a fire-sale situation where the fund has to sell perfectly good loans at steep discounts – which would hurt the value for everyone still in the fund. Instead, the funds are structured in such a way to anticipate paying out up to 5 per cent per quarter. 

But that can be cold comfort when someone wants their money now and can’t get it. 

How are the funds able to put limits in place?

The limits are built into the funds’ terms. “If I allowed more people to redeem, I’m not a fiduciary to those who are staying in because the contract states on the front page, you know, we will allow up to 5 per cent redemption every quarter,” Larry Fink, chief executive officer of BlackRock, said in a March interview with the BBC. “It’s not like it’s on page 92 of a prospectus. It’s on page one,” he said.

Is there anything affected investors can do?

Not really. Investors agreed to follow the rules of the fund when they bought their original shares. But if they are desperate to get out early, some firms including Boaz Weinstein’s Saba Capital Management offered to buy out shareholders early – at a discount. For example, the firm’s offer to buy shares of some Blue Owl funds would be at a discount of 20 to 35 per cent, meaning an investor could get as little as US$65 for shares that should be worth US$100.

How worried should I be if I bought non-traded BDC shares and now I can’t get out? 

Most likely, the worst-case scenario is that it takes a while to get your money back and you might get lower returns than you expected. It would require either an individual fund making bad underwriting decisions, or severe economic distress that affects the entire industry, for you to lose your money. Those scenarios aren’t impossible, but they are improbable. 

Is this the start of a broader financial crisis? 

While some finance executives have said they see parallels to the 2008 financial crisis, there are some key differences that others say would keep even a major default wave contained. What made 2008 so severe was the combination of risky loans and hidden debt, which triggered a collapse of confidence across the deeply interconnected financial system.

The private credit sector is under pressure, but the biggest players in the space are primarily investment firms, rather than banks, and so any losses would be akin to making bad bets in public stocks or any other market. While many banks do have a connection to private credit by providing loans to the funds to juice returns, this additional layer of leverage is considered relatively conservative by Wall Street standards. BLOOMBERG