Private Credit's Moment of Truth Approaches as Defaults Rise

The private credit market has grown from a niche asset class to a $1.7 trillion industry in less than a decade. It has never experienced a full credit cycle. That is about to change.

Reported default rates across major direct lending platforms have risen from 1.2% in early 2025 to 2.6% today. Loss given default has also increased, from an average of 35% to 48%, as collateral valuations normalize from the 2021-22 peak.

The stress is concentrated in software, healthcare services, and consumer discretionary — sectors that received the largest share of capital during the easy-money era. Many of these loans were underwritten to EBITDA multiples that assumed continued growth in revenue and margins.

"The underwriting was fine for the environment it was done in," said Victoria Ashford, credit strategist at Kestrel Partners. "The problem is that the environment changed and the loans could not."

Amend-and-extend activity has surged, with 34% of stressed loans receiving covenant relief or maturity extensions in the past twelve months. This is a normal feature of private credit's flexibility, but the current scale is unprecedented.

The investor base is the wildcard. Insurance companies and pension funds dominate the capital structure, and both face accounting and regulatory pressures that could force selling in a stressed scenario. Retail channels — non-traded BDCs and interval funds — have grown rapidly and are particularly vulnerable to redemption requests.

None of this is to say that private credit faces existential risk. The asset class was designed for exactly the environment it now faces: stressed borrowers needing flexible capital. But the pricing of that flexibility has been generous to investors, and the reckoning is beginning.