Amidst rising turbulence in the private credit industry and a series of redemption restrictions imposed by leading asset managers, Goldman Sachs economist Manuel Abecasis offers a clear assessment: while stress in private credit is unlikely to trigger significant macroeconomic spillover effects on its own, a broader tightening of financial conditions poses a greater threat. Alternative asset management giants such as Apollo, Ares, and BlackRock have recently restricted investor redemptions due to a surge in requests from retail and high-net-worth clients, sparking widespread concern about the potential for a private credit crisis to spread. Using a stress-test framework based on default scenarios, Goldman Sachs systematically evaluated the potential impact of private credit losses on overall economy-wide lending and GDP growth. The report indicates that even under an extreme scenario where the default rate rises to 10%, the drag on GDP would be limited to just 0.2% to 0.5%. The report also notes that bank lending to corporations has recently accelerated, corporate balance sheets are generally healthy, and growing investment demand related to AI will provide support to credit markets, partially offsetting the impact of a private credit tightening. Goldman Sachs emphasizes that the greater risk lies in a widening of overall credit spreads driven by uncertainty around the AI outlook, or a more widespread tightening of financial conditions. However, more pessimistic views exist in the market. UBS recently raised its baseline forecast for private credit default rates to 15%—significantly higher than Goldman Sachs' worst-case scenario—and warned of potential "serial defaults" and broad transmission risks, presenting a stark contrast to Goldman Sachs' conclusions.
**Private Credit Scale: Rapid Expansion but Still Marginal** According to the Goldman Sachs report, the private credit industry currently holds approximately $1.7 trillion in corporate leveraged loans, accounting for about 4% of total credit to the private non-financial sector. Goldman Sachs points out that despite the industry's rapid expansion in recent years, its scale remains limited compared to the overall financial system. For context, residential mortgages accounted for about 45% of private non-financial sector credit before the 2008 financial crisis, far exceeding the current level of private credit. Goldman Sachs uses this comparison to counter market views that equate current private credit pressures with the 2008 crisis, including similar analogies previously made by Bank of America strategist Michael Hartnett. Regarding current loan performance, available metrics cited by Goldman Sachs show that, as of the fourth quarter of 2025, overall performance is broadly in line with averages since 2023. The proportion of underperforming loans in private credit company portfolios increased slightly in the second half of 2025 but remained below 2023 levels. Furthermore, while the proportion of loans with Payment-In-Kind (PIK) options has increased, this primarily reflects that recent new loan originations have more frequently incorporated PIK options in their terms, rather than borrowers being forced into PIK due to financial stress—the rate of borrowers actively switching to PIK has remained stable recently.
**Software Exposure: The Most Concentrated Risk Point** The disruptive impact of the AI wave on the software industry is a core catalyst for the recent sharp deterioration in private credit market sentiment. Goldman Sachs equity analysts estimate that the software industry accounts for slightly less than 25% of Business Development Company (BDC) loan portfolios. Meanwhile, tech company borrowers have higher leverage ratios than other types of borrowers in the private credit space, and recovery rates for software loans are likely lower than in other industries—primarily because software companies lack tangible assets that can serve as loan collateral. Beyond software exposure, fraud incidents in a few large loans, along with credit vulnerabilities accumulated during the industry's rapid expansion in recent years, have also heightened market concerns about deteriorating loan quality. Goldman Sachs also notes that the interconnectedness between the private credit industry and other financial institutions has deepened: insurers have significantly increased their allocations to the sector while also leveraging up and relying more on short-term wholesale funding; banks have formed tighter linkages with private credit through providing loans and credit lines.
**Stress Testing: Quantifying Impact Under Two Scenarios** Goldman Sachs conducted stress tests based on two default scenarios, incorporating quantitative assessments that combine equity analysts' observations on inter-institutional linkages, credit strategists' conservative recovery rate estimates, and the willingness of different types of financial institutions to curtail lending under stress. Under the baseline scenario, where the private credit default rate rises from about 1% in 2025 to 3-4% (corresponding to the lower end of the historical range for leveraged loan default rates), it would generate approximately $45 billion in additional defaults. Assuming a 40% recovery rate, this corresponds to roughly $25 billion in actual losses. In this scenario, the drag on the loan stock would be about 0.2% or less (equivalent to approximately 1.5% or less of total new loan flow), and the drag on GDP would be about 0.1%. Under the extreme scenario, where the default rate rises to 10% (the upper end of the historical range for leveraged loans), it would generate approximately $150 billion in defaults. With a 40% recovery rate, this corresponds to about $90 billion in losses; if recovery rates for software loans fall to 30%, losses would expand to approximately $105 billion. Considering the impact on funders of private credit like banks, this scenario could lead to a reduction of $350 billion to $400 billion in credit to the private non-financial sector, equivalent to 5% to 6% of total new loan flow, and a GDP drag of 0.2% to 0.5%. For reference, private sector loan flow fell by about 30% during the 1990 recession and savings and loan crisis, and by about 55% following the 2008 financial crisis. Goldman Sachs also notes that a contraction in lending does not translate proportionally into a decline in output—unaffected lenders can partially fill the gap. According to its vector autoregression model based on the Financial Conditions Index and the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS), a 1% decline in the loan-to-GDP ratio corresponds to a drop in real GDP of approximately 0.3% to 0.4%.
**Controversy and Limitations Behind the Optimistic Conclusion** Goldman Sachs' conclusion is based on several important premises, which the report explicitly mentions: that the Iran conflict can be resolved quickly without triggering a global stagflationary recession, and that the AI bubble does not burst. The report also acknowledges that if the shock triggers large-scale psychological panic at the market level, leading lenders to proactively curtail lending beyond direct exposures and regulatory constraints, the indirect effects could exceed the estimates of the current model. Goldman Sachs adds two technical clarifications: First, a default on a private credit loan does not equate to a monetary loss in the same direct way as other loan types, because private credit contracts typically contain more covenants that can trigger default protections before a borrower misses an interest payment. Second, private credit loans currently occupy a more senior position in the borrower's capital structure, meaning that a higher private credit default rate would likely highly overlap with losses in other asset classes, which is an unfavorable factor for the overall market. In contrast to Goldman Sachs, UBS's recent baseline scenario—a 15% default rate—far exceeds Goldman's extreme assumption and warns of potential "serial defaults" and widespread transmission effects. The significant divergence between the two institutions highlights the high degree of uncertainty in assessing the path of private credit risk and suggests that investors should maintain caution when referencing institutional forecasts.
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