Private credit dispersion: Rising stress, not systemic disruption

Rising stress in private credit highlights the importance of differentiation.

Private credit has entered a period of rising stress, with risk increasingly uneven across segments. While recent developments have drawn heightened attention to the asset class, we view the environment as one of adjustment and repricing rather than broad based dislocation.

As private credit continues to evolve, we believe differentiation, structure, and credit quality are likely to matter more than ever, creating clear winners and losers across strategies.

After years of abundant capital and strong inflows, softer underwriting standards have emerged in parts of the market. We believe the resulting pressure is likely to remain contained at the asset class level—but felt more acutely in certain segments. In our view, the outcome is not a collapse, but greater dispersion across managers, vintages, and structures—with meaningful implications for investors.

Credit risk re-emerges after years of easy capital

A prolonged search for yield, combined with a relatively resilient US economy through and following the Fed’s hiking cycle, supported strong flows into both public and private credit. These dynamics pushed spreads toward historically tight levels—spreads for US investment-grade and US high yield were in the bottom (lowest) 3% and 2%, respectively, as of end of December 2025.¹ More recently, headlines around issuer write downs, platform specific failures, business development company (BDC) markdowns, and redemption activity in certain private credit vehicles have prompted investors to reassess how risk, structure, and credit quality vary across strategies (Figure 1).

Context is important—credit cycles are not new. Periods of strong growth and easy financing often can lead to deteriorating underwriting standards; when conditions normalize or slow, losses have tended to follow. These losses may be concentrated, like energy in the 2010s, or systemic, like the period following the Global Financial Crisis.

In our view, current stress extends beyond isolated incidents but remains focused within a relatively narrow portion of the market—most notably middle market direct lending, particularly in software related exposures. Potential spillovers may affect lower quality leveraged loans and collateralized loan obligations (CLO) equity, but we believe outcomes will depend far more on underwriting discipline, portfolio construction, and platform design than on asset class labels alone.

That distinction is important given private credit’s continued role in institutional portfolios.

Where stress has emerged—and why it differs across segments

Headlines often group private credit together, but there are distinct dynamics that have played out across different parts of the market. Understanding these differences is critical to assessing both risk and opportunity:

• Platform specific operational challenges

In our review, the failure or distress of an individual lender or platform should generally be viewed as idiosyncratic and operational in nature, rather than evidence of broad credit deterioration. Weak governance, control failures, or concentrated exposures can materially increase vulnerability at the platform level.

Single platform lending models, in particular, depend heavily on execution and concentration risk. By contrast, diversified structures—such as senior investment grade asset based finance—are typically designed with independent collateral verification and legal protections intended to mitigate downside risk when conditions deteriorate.

• Cyclical pressure in middle market direct lending

Software related lending sits at the center of current stress, particularly for smaller, more leveraged borrowers. In addition to cyclical headwinds, these exposures have been increasingly evaluated through the lens of potential disruption from AI, adding another layer of uncertainty.

Borrowers in this segment are especially sensitive to refinancing conditions as older vintages approach maturity in a materially different rate and liquidity environment. Even companies with durable business models may face challenges if financing availability tightens due to sector level concerns. As a result, we believe outcomes within software lending are likely to be highly uneven, with some businesses adapting successfully while others struggle.

These dynamics are visible in BDC performance, where recent markdowns reflect cyclical pressure in portions of sub investment grade lending. Year to date, BDCs have underperformed broader public credit markets, underscoring the selective nature of current stress (Figure 2).

• Moderation in lending activity

Weakness in software related loans and tighter underwriting standards can have broader ripple effects. Declining loan prices may trigger CLO covenant tests, leading to forced selling and additional price pressure. Softer CLO returns, in turn, can reduce demand from marginal buyers, slowing the flow of capital into new lending and sharpening the focus on underwriting. Given today’s tight spread environment, even modest changes in capital availability could result in rapid repricing, reinforcing the importance of structure and discipline.

• Headline driven volatility

The pace and visibility of private credit adjustments are likely to be influenced by headlines. High profile liquidity actions—such as capped withdrawals or platform level insolvencies—can amplify perception risk, particularly in less liquid vehicles.

Recent redemption activity and liquidity management measures in certain non traded BDCs highlight ongoing mismatches between investor liquidity expectations and underlying asset structures. In segments tied to CLO flows, shifts in marginal buyers can drive short term volatility that temporarily overwhelms fundamentals, both positively and negatively.

The adjustment phase: Repricing and greater dispersion

Private credit is a large and diverse market, spanning a wide range of credit quality, structures, and economic drivers. As conditions normalize, outcomes are likely to diverge more meaningfully across managers, sectors, and vintages.

Investment grade asset based finance—such as equipment leasing for airlines or rental fleets—remains structurally distinct from sub investment grade middle market lending or lower quality CLO tranches with concentrated software exposure. Even within corporate lending, structural protections and collateral quality create materially different risk profiles.
As a result, we believe performance is likely to be highly manager and structure specific, rather than driven by broad asset class trends.

Looking ahead: Selectivity over scale

As private credit continues to play a significant role in institutional portfolios, we believe the next phase will reward underwriting discipline, diversification, structural protections, and a clear understanding of market mechanics. This period of adjustment reinforces a familiar lesson: successful credit investing requires rigorous due diligence, thoughtful liquidity management, and awareness of platform level risks. As imbalances correct, opportunities will emerge—but they are unlikely to be evenly distributed.

In our view, the key question for investors is not whether private credit will endure, but which parts of the market are built to withstand a potentially more selective, less forgiving environment—and which managers are best positioned to navigate that environment.