Private credit has increasingly moved from institutional investors to a broader range of individual portfolios, often through fund structures tailored for non-institutional participants. This shift has brought new attention to the liquidity risks inherent in private loans, which are not frequently traded and can be difficult to sell quickly during volatile market periods.
A recent example highlighting these risks involves Blue Owl, a business development company (BDC) that restricted investor withdrawals in a non-traded private credit fund targeting individuals. Reports indicated that payouts would now occur occasionally and be funded by repayments and asset sales, rather than through regular quarterly redemption offerings. This change means some investors may face delays or limitations when trying to exit their investments.
Market sentiment toward private credit risk has been influenced by pressure in public loan markets at the start of 2026. For instance, a passive fund tracking the Morningstar LSTA U.S. Leveraged Loan Index dropped over 2% in February, with software loans accounting for 26% of its capital according to Bloomberg. In contrast, below investment grade corporate bonds saw almost no return for the month and have only a 3% exposure to software loans. Debt from highly leveraged or smaller software companies faced particular stress despite active refinancing and merger activity, signaling that investors are becoming more selective rather than uniformly accepting risk. The divergence between different credit markets underscores the importance of diversification and active management.
Retail-focused private credit vehicles have also encountered increased liquidity challenges. Fitch reported that redemptions for non-traded, perpetual BDCs it monitors rose to an average of 4.5% of net asset value in the fourth quarter of 2025, up from 1.6% in the previous quarter, while fundraising slowed among these funds. Higher redemption demands can strain semi-liquid vehicles holding illiquid loans.
Concerns about collateral quality have intensified following the collapse of Market Financial Solutions Ltd. in the United Kingdom. The company entered administration after an unexpected banking issue limited access to banking facilities, even though it described itself as asset-backed. Reuters reported court documents indicating that some assets had been pledged as collateral on multiple loans—a practice known as “double pledging”—raising concerns about possible collateral shortfalls. Similar issues were seen last year with First Brands Group and Tricolor Holdings.
Default rates offer another measure of market stress. As of January 31, 2026, Moody’s reported a trailing 12-month default rate for below investment grade loans at 5.5%, compared with a rate of 3.4% for high yield corporate bonds. While loan defaults are somewhat above long-term averages, they remain within normal ranges; high yield bond defaults are slightly below average.
The scale of private credit has drawn scrutiny as well: public reporting places global private credit assets around $2 trillion since significant growth following the global financial crisis.
Software and services loans are currently drawing particular attention due to debates over how artificial intelligence might impact business models in this sector. In early February, Software & Services accounted for about 16% of outstanding debt in the Morningstar LSTA US Leveraged Loan Index; more than half held ratings at B-minus or lower from Fitch—levels considered highly speculative—which can complicate refinancing if market sentiment worsens.
Pricing reflects this caution: roughly 21% of Software & Services loans traded below $0.80 per dollar of face value as maturities cluster around 2028 and 2029—suggesting investors require steep discounts due to uncertainty over refinancing prospects and liquidity constraints.
Private credit remains an option for qualified investors focused on downside protection and careful underwriting practices; alignment between loan maturity schedules and investor liquidity expectations is key to avoiding forced sales at unfavorable prices.
Two definitions help clarify risks: “Maturity” refers to how long until a borrower must repay a loan; “liquidity” is how quickly an investment can be converted into cash without significant loss in value. Problems often arise when funds promise frequent withdrawals but hold assets that cannot easily be sold during market stress.
Investors may manage risk by choosing first lien or senior secured loans—those backed by collateral and prioritized over other debts—but diversification and disciplined management remain important because not all risk can be eliminated.
Private credit generally involves lending outside public bond markets via directly negotiated company loans that may offer higher yields but lower liquidity than traditional bonds; outcomes depend largely on whether fund structures align with underlying loan characteristics.
BDCs provide capital mainly through private lending to small- and mid-sized businesses; while some trade publicly, others restrict redemptions due to underlying loan illiquidity—a feature that becomes especially relevant during periods of heightened withdrawal demand.
Ultimately, private credit funds may limit redemptions because selling multi-year illiquid loans quickly often requires accepting discounts on price; therefore, redemption features should always be considered alongside diversification strategies and assessment of overall credit quality.
