By Bill Alpert
After enduring a near bank run in recent weeks, private credit is about to lay more cards on the table. We should have a better idea in a few weeks if the industry will regain favor -- or remain under a cloud.
It wasn't long ago that private credit was the place to be, if you had the money and the right wealth advisors. But too much cash poured into the sector, credit funds began making less profitable loans, and questions mounted about loan quality. Last month, wealthy investors mobbed the exits.
Now investors wonder if the bank run is over.
We will find out in the next few weeks, as credit-fund managers such as Ares Management and Blue Owl Capital discuss first-quarter earnings. Among other topics, they will undoubtedly spend a lot of time talking about fund-raising.
The federal government recently permitted retirement plans, including the $14 trillion target-date fund industry, to begin holding private credit along with traditional stocks and bonds. Will these new inflows offset additional rounds of redemptions by wealthy investors?
Over the long run, the private-credit industry might well benefit from less money pouring in. Most private-credit loans go to companies bought by private equity, but the pace of buyouts hasn't kept up with the flood of money pouring into the credit funds. To get it all invested, funds eased their lending terms. The industry itself has said as much.
"The shift toward gathering client funds intended to be immediately deployed rather than patiently invested has led to structural underearning and looser protections on assets across the sector," say managers of Sixth Street Specialty Lending, a publicly traded private-credit fund organized as a business development company, or BDC. "The result is what we see today: a BDC sector going through an intense yet warranted reset."
The private-credit industry sprang up in the wake of the 2008 financial crisis to fill lending gaps left by cauterized commercial banks. Publicly traded BDCs like Ares Capital and Blue Owl Capital supplied credit for private-equity buyouts, in place of broadly syndicated loans arranged by banks. Some of those listed BDCs grew large, but a much larger amount of money piled into nontraded BDCs marketed through banks and brokers to institutions and wealthy individuals.
The credit funds boosted their returns by leveraging their investors' funds through borrowing. Their profits mainly came from the spread between the interest they paid on those borrowings and the higher rates they charged on floating-rate loans to their corporate borrowers.
Exuberance seized the sector in 2023 and 2024, when the Federal Reserve raised interest rates. Yields on private-credit portfolios climbed to 12% for the best-secured first-lien loans. Dividends grew so fat that BDCs stashed some profits in rainy-day "surplus" accounts.
The high yields of those peak credit years helped nontraded BDCs grow their assets by more than $150 billion between 2023 and 2025, according to With Intelligence researchers at S&P Global. Other varieties of credit funds, such as interval funds, grew assets by another $150 billion over the same period.
Fund managers had to quickly deploy all that money into loans to meet tax rules and generate fees for themselves or for shareholders of publicly traded management companies like Blackstone, Apollo Global Management, Ares, and Blue Owl.
And that's when the spreads shrank.
As funds competed to lend their money, they allowed more borrowers to defer cash interest payments by adding a period's interest to the loan amount as " payments in kind." They also let spreads on first-lien loans slip from nearly 6% in 2023 to 5% by 2025.
Portfolio yields -- and profit coverage of dividend payouts -- slipped more steeply, because the base rate underlying the floating-rate loans dropped as the Fed eased interest rates. From a 2023 peak of 12%, the average yield on a first-lien loan fell below 10% by 2025. And then dividend payouts started to decline.
News stories about wealthy investors' disenchantment have focused on particular bad loans, or the threat of artificial intelligence to the funds' software industry borrowers. On Thursday, the Wall Street Journal reported that regulators across several federal agencies were examining private credit firm disclosures and valuations for their loans.
The BDCs insist their loans are solid. But narrowed spreads and dividend cuts may be reason enough for some investors to seek greener pastures.
Nearly every nontraded BDC saw March-quarter redemption requests swell above the 5% of net assets that managers prepare for. Requests jumped to 22% and 41%, respectively, at the big nontraded Blue Owl Credit Income and Blue Owl Tech Income funds.
Redemptions at the industry's biggest nontraded fund, the $86 billion in assets Blackstone Private Credit Fund, or BCRED, were 7%. As one of the first managers to report, Blackstone said this past Thursday that BCRED's March quarter net return was flat. Its outflows came from a relatively few large accounts, with most individual investors staying put. Institutional investors continue to commit large-scale capital to private credit, said Blackstone CEO Stephen Schwarzman.
As credit funds move past March redemptions, industry bulls are celebrating what they see as an industry reprieve, if not a return to favor. In quarterly earnings calls, big bank critics like JPMorgan Chase CEO Jamie Dimon seemed to walk back their past cautions on private credit's vitality. Even steeply discounted stocks of listed BDCs have recovered some of their lost valuations.
Whether spreads and dividend coverage will revive remains an open question. Even if the wealthy set continues to seek the exits, a new wave of individual money may be coming.
We'll see how private credit spreads hold up in the face of that new capital.
Write to Bill Alpert at william.alpert@barrons.com
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(END) Dow Jones Newswires
April 24, 2026 02:30 ET (06:30 GMT)
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