In the first blog post in this series, we covered what private credit is and why it grew. This post focuses on what is happening in the market right now.
Most of the content being produced about private credit right now focuses on the yield story. Eight, nine, sometimes ten percent in an environment where income has been difficult to generate. That figure is accurate. It is also incomplete. In early 2026, three events occurred in the private credit market in quick succession. None of them received proportionate attention in the financial press relative to their implications for retail investors. Taken together, they represent a pattern that deserves careful review before any allocation decision is made, or before any existing allocation is left unexamined.
At Avion Wealth, we have been tracking these developments closely as part of how we evaluate alternative allocations for business owners and high-net-worth investors. What follows is the context we consider essential.
Three Events That Deserve Attention
The first quarter of 2026 produced three distinct stress signals within a compressed timeframe.
First: Cliffwater’s flagship private credit vehicle, one of the largest retail-accessible funds in the space with approximately 33 billion dollars in assets, limited investor redemptions to seven percent of shares after investors attempted to withdraw nearly double that amount. Redemption gates of this kind are a contractual feature of many private credit funds — but their activation is meaningful. It signals that investor demand for liquidity exceeded the fund’s capacity to provide it without disrupting the underlying portfolio.
Second: Morgan Stanley’s North Haven Fund, with close to eight billion dollars in assets, honored only 45 percent of redemption requests after investors sought to withdraw approximately eleven percent of net asset value. Less than half of investors who sought liquidity received it in full.
Third: JPMorgan marked down the value of loans it holds as collateral against private credit funds, specifically flagging concerns about software company borrowers being disrupted by artificial intelligence, and indicated this would tighten lending to those funds going forward. When one of the largest banks in the world reduces its appetite for private credit collateral, the downstream effect on fund liquidity and leverage capacity is not trivial.
Each of these, in isolation, carries an explanation. Redemption gates are disclosed in fund documents. JPMorgan’s view on AI disruption reflects a legitimate credit concern. But the concentration of these events within a single quarter is the detail worth examining. Market stress rarely announces itself through a single data point.
Rising Defaults and the Numbers Behind Them
These events are occurring against a backdrop of rising default rates among private credit borrowers. Default rates in this asset class had been historically low through 2022 and 2023, which contributed to the favorable return figures that drove significant capital inflows. That environment has been changing.
Deutsche Bank has projected that private credit defaults could reach between 4.8 and 5.5 percent before the end of 2026. UBS has projected an increase of as much as three percentage points, potentially outpacing default trends in leveraged loans and high-yield bonds. Morningstar DBRS has issued a negative outlook for the sector, citing weakening profit margins among borrowers.
Those figures matter. But understanding them requires one additional layer of context, because the headline default rate in private credit may materially understate the actual level of portfolio stress.
Why Headline Metrics May Understate Distress
Private credit lenders have two tools that allow them to manage borrower difficulty without triggering a formal default. Both are legal, both are disclosed in fund documents, and both are worth understanding before accepting a reported default rate at face value.
The first is payment-in-kind interest, commonly referred to as PIK. Instead of paying cash interest on a scheduled basis, a borrower is permitted to accrue additional debt. The lender records the income on paper without receiving cash. The borrower’s total debt load grows. The underlying credit problem is deferred rather than resolved. From the outside, the loan appears performing. In practice, the borrower’s financial position may be deteriorating.
The second is a liability management exercise. This occurs when a struggling borrower renegotiates the terms of its debt — extending maturities, adjusting covenants, or swapping instruments — without formally triggering a default event. Again, the loan continues to appear in good standing in reported metrics. The distress is present; the reporting does not reflect it.
When these mechanisms are factored into the analysis, some analysts estimate the effective distress rate in private credit portfolios is approaching or exceeding five percent — roughly double what traditional default metrics reported as recently as 2023. The gap between the headline figure and the effective figure is a function of how private credit funds are structured, not a function of fraud or misreporting. But it is a gap that investors evaluating these products deserve to understand.
The Interconnectedness Problem
One aspect of private credit that rarely appears in marketing materials is its indirect connection to government-backed funding and the regulated financial system more broadly. The Federal Home Loan Bank system carries an implied government guarantee, which allows it to borrow at near-Treasury rates. The Congressional Budget Office has estimated this implied subsidy at approximately 6.9 billion dollars annually. While private credit firms are not direct members of the Federal Home Loan Bank system, they have accessed this subsidized liquidity indirectly — through member banks that lend to private credit vehicles, and through insurance company affiliates.
Bank lending to private credit vehicles increased by approximately 145 percent between 2020 and 2024, reaching around 95 billion dollars. This creates a degree of interconnectedness between private credit and the regulated financial system — the kind of linkage that makes contagion possible if stress spreads beyond a single fund or sector.
Regulators have expressed concern about opacity in this space. Unlike banks, private credit funds are not subject to the same disclosure requirements. That means regulators and investors alike lack full visibility into the exposures building across the system. The absence of that visibility does not mean the risk is absent.
What This Is, and What It Is Not
To be precise about what is and is not being argued here: this is not a forecast that private credit will collapse or that the asset class will cease to function. At approximately two trillion dollars globally, it remains smaller than the traditional banking sector and has not been designated systemically important by regulators. The more probable near-term scenario is not a crisis but a gradual repricing — continued redemption pressure, tightening of bank credit lines to private funds, and a slow erosion of the return premium that made the asset class attractive in the first place.
For institutional investors who built their private credit allocations earlier in the cycle, that gradual repricing may be manageable. They entered at more favorable valuations, with longer time horizons and more sophisticated tools for monitoring portfolio quality.
For retail investors being presented with packaged private credit products today, the question is different. It is not whether the asset class survives. It is whether the current risk-reward proposition — at this point in the cycle, in these structures, with these fees — justifies a new allocation or warrants leaving an existing one unreviewed.
That is the question the third and final post in this series addresses directly, with a practical framework for investors in three common situations.
If your current portfolio includes private credit, or if you are being presented with an opportunity to add it, these developments may be worth reviewing alongside a qualified advisor before taking action. Avion Wealth offers a complimentary second opinion review for investors evaluating their alternative allocation strategy.
To your success,
The Avion Wealth Team