Private Credit Is Being Stress-Tested

What the Recent Headlines Actually Reveal

Private credit is now a $1.8 trillion market.

Over the past few weeks, two of the most sophisticated names in the space reported visible stress.

That is not a collapse.

But it is a signal.

If you allocate capital to private credit — or are considering it — this moment deserves clear thinking, not headlines.

Here’s what actually matters.

What Happened

Blue Owl Capital restricted withdrawals from one of its retail-focused credit funds, restructuring how liquidity would be distributed to investors.

Shares declined. Competitors sold off.

Separately, BlackRock marked down portions of a middle-market lending portfolio after non-performing loans increased materially. Net asset value fell. Management fees were partially waived.

Two separate firms.
Two different situations.

Same underlying theme.

Incentive design meeting higher interest rates.

The Real Issue: Structure, Not Headlines

Private credit expanded rapidly during the zero-rate era.

Capital was abundant.
Refinancing was easy.
Valuations were forgiving.

Underwriting did not need to be perfect to look good.

When rates rise 400+ basis points in under two years, assumptions get tested.

Borrowers who underwrote debt at 2020 rates are servicing it at 2024 costs.
Refinancing windows narrow.
Coverage ratios tighten.

Stress reveals structure.

That is what we are seeing.

The Liquidity Mismatch

There is a second structural issue that deserves attention.

Private loans are inherently illiquid. They are negotiated instruments, not exchange-traded securities. The premium yield exists precisely because capital is locked.

Some retail-oriented vehicles layered periodic liquidity on top of those illiquid assets.

That works when inflows are stable.
It becomes complicated when redemption requests accelerate.

Managers are left with three imperfect options:

Sell loans at discounts.
Restrict withdrawals.
Restructure terms.

This is not about one firm.

It is about how illiquid assets were packaged for broader distribution during a benign credit cycle.

When the cycle turns, mismatches become visible.

What Durable Private Credit Requires Now

Private credit as an asset class is not broken.

But 2026 private credit must be built differently than 2021 private credit.

Here is what matters:

1. Tangible Collateral

Unsecured lending to growth companies behaves differently than asset-backed lending secured by hard collateral.

In a downturn, what you can take back matters.

Downside protection begins with the asset.

2. Balance-Sheet Alignment

Originate-to-distribute models prioritize transaction volume.

Balance-sheet lenders who retain exposure to the full life of the loan prioritize durability.

When the lender’s capital sits alongside yours until maturity, incentives change.

3. Conservative Leverage

Fund-level leverage amplifies returns.

It also amplifies drawdowns.

Lower leverage reduces headline yield. It also reduces fragility. For investors focused on capital preservation, that trade-off is rational.

4. Underwriting Through a Recession Lens

If a structure only works because rates are expected to fall, it is not durable.

Cash flow must support debt service at today’s rates.
Refinancing cannot be the sole strategy.
Vintage risk matters.

Resilience is engineered upfront, not assumed later.

The Bottom Line

Private credit is not collapsing.

It is being stress-tested.

Some structures will hold.
Some will not.

That is healthy.

Markets mature through discipline, not optimism.

For investors, this is not a moment to retreat from private markets.

It is a moment to ask better questions:

What secures the loan?
Who holds the risk?
How much leverage sits above me?
What happens if refinancing markets stay tight for two more years?

Structure before yield.
Alignment before scale.
Collateral before coupon.

Capital preservation is not a marketing phrase.

It is a design choice.

—
Morgan Keim
Founder, Ocean Ridge Capital