By Matt Wirz and Alexander Gladstone
Two big loans that were made during the postpandemic boom in private-equity buyouts are defaulting, whacking some private-credit funds and ratcheting up losses in the already troubled corner of Wall Street.
Software maker Medallia -- a poster child for the intersection of investor concerns between technology and private capital -- can no longer repay about $3 billion of loans from firms including Blackstone, KKR and Apollo Global Management. The lenders are negotiating to take control from private-equity owner Thoma Bravo, which will likely lose $5.1 billion it invested in the company in 2021, people familiar with the matter said.
At the same time, Blackstone, KKR and others are restructuring a $1.4 billion loan they made to help Harvest Partners and other private-equity backers pay for a 2021 buyout of dental-services company Affordable Care, the people said.
The losses are a small slice of the now $2 trillion in loans that private-credit funds have made to companies, but they are intensifying investor angst about the underlying health of these giant lenders on Wall Street.
"It's worthwhile to separate fact from fiction," Blackstone Chief Executive Stephen Schwarzman said about the perceived risk in private credit on a conference call Thursday with analysts. Defaults are rising, but the firm's funds have plenty of cash and other resources to offset losses, he said.
Individual investors have been pulling money out of private-credit funds at a rising pace this year, a phenomenon fund managers have blamed on irrational fears fanned by the media. They highlighted how few of their loans were in arrears.
Now, losses are starting to pile up.
Earlier this week, Blackstone's largest private-credit fund, known as BCRED, reported its nonperforming loans in the first quarter rose to a record 2.4% of its $80.5 billion portfolio.
Blackstone said Medallia and Affordable Care were the largest reasons for the increase.
"These companies combined represent approximately 1% of the fair value of BCRED's portfolio," a Blackstone spokesman said. "We've marked down the loans significantly, which is already reflected in performance."
The fund-management company reported a 25% rise of distributable earnings in the first quarter but its shares dropped 6%.
Restructurings force private-credit funds to mark down loans, sometimes sharply. Blackstone and KKR valued their Medallia loans to around 80 cents on the dollar in December before slashing them to 60 cents this month.
Analysts worry that losses could be even higher if the businesses continue to struggle after lenders take them over, and that new defaults could keep coming.
"What we saw last quarter was a lot of bad getting worse," said Finian O'Shea, an analyst at Wells Fargo. "Now it's not worsening but it's not getting better and that probably remains the case all year -- a slow bleed."
At KKR, the restructurings will add to defaults at one of its largest private-credit funds, which already had 5.5% of its loans in default in December. Credit ratings firm Moody's downgraded the roughly $13 billion fund to junk debt status in March citing poor performance.
Medallia is an important test case for the private-credit industry because many firms concentrated 20% or more of their funds in loans to software companies. Now some of those borrowers are at risk of displacement by artificial intelligence. The coming "SaaSpocalypse" will likely double the default rate in private credit this year to 9%-10%, analysts at UBS said in a report this month.
Private-credit firms say their losses pale compared with the pain hitting private-equity firms that bet big on software and lose most or all of their investments in defaults.
Apollo executive John Zito, co-president of the firm's asset-management arm, has said peers across private-equity have been arrogant about their values on buyouts, including Medallia.
"I literally think all the marks are wrong," Zito told some investors, The Wall Street Journal reported. "Is that what you're asking me? I think private-equity marks are wrong."
Thoma Bravo, a longtime technology investor, and its founder Orlando Bravo have been clapping back. The firm signaled at a recent investor conference that it still sees buying opportunities and is differentiating between ventures that are likely to be disrupted by the AI revolution and those poised to be winners.
"Medallia is a fine company," Bravo said last month on CNBC. "We made a mistake and that caused us to pay too much."
Thoma Bravo's other portfolio companies "are absolutely crushing it," he said.
Medallia, which provides software for employee and customer feedback, faced problems even before the advent of AI. The interest expense on the loans Thoma Bravo used to purchase the company shot up in 2022 when the Federal Reserve raised benchmark interest rates, a widespread problem among leveraged buyouts at the time.
Sales also suffered because of increased competition from Qualtrics, another private-equity owned software company with debt troubles of its own.
The credit crunch came this year because Medallia's loans contained provisions requiring Thoma Bravo to invest more in the business if it failed to meet earnings targets. Thoma Bravo has until the end of June to make the cash injection but it recently told Blackstone -- Medallia's largest lender -- that it is turning the keys to the company over to creditors instead, people familiar with the matter said.
The private-credit funds hired Alvarez & Marsal as a financial adviser to vet Medallia's finances and are aiming to restructure the company among themselves rather than in bankruptcy court, the people said. They are considering cutting Medallia's loans to about $1 billion to $1.4 billion, or five to seven times the company's $200 million of earnings before interest, taxes, depreciation and amortization, they said.
Creditors would also receive 100% of shares in the company.
Write to Matt Wirz at matthieu.wirz@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com
(END) Dow Jones Newswires
April 24, 2026 12:51 ET (16:51 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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