Recent headlines around private credit have raised understandable concern among investors. However, a closer look suggests that much of the recent volatility is being driven by developments in a relatively narrow segment of the market, rather than a broad deterioration in credit fundamentals.

The pressure has been most visible in retail-oriented vehicles, particularly Business Development Companies (BDCs). These funds typically invest in sub-investment grade direct lending portfolios and often employ fund-level leverage to enhance returns¹. At the same time, valuations are generally updated on a quarterly basis and are frequently determined internally, which can create questions around transparency during periods of market stress².

As concerns around liquidity and valuation have increased, some of these vehicles have experienced redemption pressure³. Importantly, this dynamic appears to be more technical in nature than fundamental. In our view, it reflects investor behaviour in response to structural features of the product, rather than a broad-based weakening across private credit markets.

A structural mismatch comes into focus

The rapid expansion of retail-oriented private credit strategies in recent years⁴ has introduced a structural tension that is now becoming more visible.

Following 2021, several noteworthy firms played a significant role in broadening access to private credit through vehicles that offer periodic liquidity. While these structures have been successful in attracting capital, they invest in inherently illiquid assets, namely, private loans. This creates a mismatch between the liquidity expectations of investors and the underlying characteristics of the assets themselves⁵.

In stable markets, this tension is manageable. However, during periods of uncertainty, it can lead to increased volatility, particularly when combined with the use of leverage. The result is a feedback loop in which redemption requests, valuation uncertainty, and liquidity constraints reinforce one another, often amplifying negative headlines.

Contained stress, not systemic risk

Despite the attention these developments have received, it is important to place them in context. Retail-oriented structures account for a relatively small portion of the overall private credit market—approximately 15%⁶. The remaining majority is held by institutional investors in long-term, closed-end vehicles that are not subject to the same liquidity dynamics.

In addition, many managers have responded proactively to recent pressures by implementing measures such as limiting redemptions, which has helped stabilize flows⁷. These factors suggest that current stresses are concentrated rather than systemic.

From a fundamental standpoint, the broader private credit market remains relatively stable. Default rates are still low by historical standards, generally in the range of 1% to 3%⁸, and there has been no widespread wave of bankruptcies⁹. That said, early signs of stress are beginning to emerge. These include an increase in out-of-court restructurings and a growing number of companies opting to defer cash interest payments¹⁰.

Taken together, these trends point to a gradual normalization in credit conditions rather than an abrupt deterioration.

Pressure points are emerging, but remain contained

While the overall picture remains stable, certain sectors are experiencing more pronounced pressure. Software lending is one such area.

Many software companies took on debt during the 2021–2022 period at elevated valuations¹¹. As those valuations have since adjusted—partly reflecting uncertainty around the long-term implications of artificial intelligence—equity cushions have narrowed. In some cases, this has led to an increase in distressed situations within the sector.

However, these stresses appear to be largely contained within specific pockets of the market. There is little evidence at this stage to suggest that they are spreading in a way that would pose broader systemic risks.

Why broader contagion appears unlikely

Looking beyond individual sectors, the structure of private credit markets provides several important safeguards against systemic risk.

The asset class itself remains relatively small, representing less than 0.5% of the global investable universe¹². In addition, exposures are widely distributed and are not concentrated within the banking system in the way that has characterized past financial crises¹². Capital structures also typically include meaningful equity buffers from sponsors, who are positioned below lenders and have both the incentive and the capacity to support their investments.

These features collectively help to absorb shocks and limit the potential for broader contagion.

Implications for investment grade credit

Resilient fundamentals with limited direct exposure - For investment grade credit markets, the direct impact of recent developments in private credit is expected to be limited. Exposure to more vulnerable segments, such as sub-investment grade direct lending and certain areas of asset-based finance, represents only a small share of the broader investment grade universe¹².

That said, indirect effects could emerge if refinancing conditions become more challenging in those segments. Even in that scenario, investment grade issuers are generally better positioned than their high yield counterparts. Stronger balance sheets, higher credit quality, and more consistent access to capital markets provide important advantages, particularly in periods of uncertainty.

Supportive technicals provide a buffer - Market technicals continue to offer meaningful support for investment grade credit. Over the next one to two years, coupon income and maturing bonds are expected to absorb a significant portion of new issuance¹³. This steady reinvestment demand helps anchor the market, even during periods of volatility. Indeed, recent episodes of spread widening have been met with disciplined capital stepping in, reinforcing stability and reducing the likelihood of disorderly repricing.

As a result, our base case remains one of modest spread widening rather than a sharp or sustained selloff.

A shift toward a more selective market environment - More broadly, the current environment is increasingly characterized by dispersion across sectors and issuers. Rather than a uniform move in credit markets, performance is diverging based on underlying fundamentals. This shift is creating a more selective opportunity set, where outcomes depend less on broad market direction and more on issuer-specific factors. In this context, credit markets are evolving into a “credit picker’s market,” where careful security selection and relative value analysis become more important.

While risks remain, including the potential for higher oil prices, persistent inflation, or a broader macroeconomic shock, the absence of a sustained external shock suggests that dispersion, rather than widespread stress, is likely to define the path forward.

Bottom line: stay selective, stay disciplined

The outlook for investment grade credit remains constructive, albeit more balanced than in recent years.

Recent volatility in private credit markets reflects structural dynamics and localized pressures rather than systemic risk. For investors, this underscores the importance of maintaining discipline—both in credit selection and in liquidity management.

In an environment defined by differentiation rather than uniformity, the ability to identify resilient issuers and capitalize on selective opportunities will be key to navigating the months ahead.