Big private credit managers are trying to control the narrative, but the numbers are becoming harder to ignore.
KEY TAKEAWAYS
Private credit stress is showing up more clearly in Q1 earnings. Rising non-accruals, NAV pressure, and redemption requests are becoming harder for managers to frame as isolated events.
Ares (ARCC) reported higher non-accruals, a lower NAV, and core EPS below its dividend. Its CEO also signaled that industry credit quality may revert closer to historical norms.
BCRED saw NAV decline for three straight quarters and reported higher non-accruals. It also faced its largest redemption quarter ever and needed Blackstone support to meet exits.
Blue Owl is still producing strong fee-related earnings, but redemption pressure remains real. Investors requested large withdrawals, and gated exits show the liquidity mismatch in semi-liquid private credit funds.
This is not a private credit collapse, but it is normalization after a period of overly optimistic underwriting. Larger platforms may manage through it, while weaker lenders and yield-chasing vehicles face more risk.
MY HOT TAKES
Private credit managers are not saying “everything is fine” by accident. They are controlling the narrative because investor confidence is part of the product.
Non-accruals are the signal to watch. When borrowers stop paying cash interest, the glossy yield story starts needing footnotes.
Redemption gates are not technical details. They are the moment investors learn that “semi-liquid” does not mean liquid when everyone wants out.
The biggest platforms will probably survive this cycle. The real damage is more likely to show up in smaller, aggressive lenders that chased yield down the quality curve.
Private credit is not broken, but the fantasy version of private credit is. Investors need to understand the collateral, manager quality, liquidity terms, and whether the yield actually pays them for the risk.
You can quote me: “The private credit market is not collapsing, but the zero-loss fantasy is.”
Home to roost. Well, it’s been a minute since we talked about private credit–more specifically about its…er, challenges. Not that the problems went away, but because we exhausted all data points and I have been lying in wait for some more. Some more potential info on redemptions, loan performance etc. We would expect to find this information in these companies’ earnings announcements. Not in black and white mind you–no–we are going to have to work for it–do some sleuthing. You see, bankers are really good at telling you something but not really telling you something. For example–and related to this very issue–when Jamie Dimon made his now infamous “cockroach” analogy (which I wrote about at the time) last year, he was saying something. The statement was artfully designed to make it look like JPMorgan was not in deep 💩 with its, but–and here is the unwritten stuff–they probably have some exposure and they are are on top of it–not in it. If he didn’t say anything, which was his prerogative, and later disclosed loan write-downs, Dimon would have been sent to the penalty box.
So, it is important for bankers to control the narrative with a firm but not-obvious hand. People, as you may know, are rather antsy when it comes to their money. A banker would never want to exude anything but the utmost confidence in the safety of their money. This, of course, extends to their musings about the economy. You will notice that bankers will never tell you that things are bad, but they are compelled to tell you “there may be challenges,” and they might even add, “but there may not be challenges either.” In other words, don’t panic, we are aware, and we got this.
As you might guess, I have been watching Q1 earnings from the big players in the space–really carefully–for signs that the situation is getting worse–or better; I would love to be wrong about this. My regulars know that I have been banging this private credit drum for at least nine months now, and I have to be honest with you–I did not expect any significant confirmation to arrive this quickly or this clearly.
Back in the summer of 2025, when private credit was still the darling of every alternative investment conference and the BDC space was printing yields that made income investors feel like they had found the holy grail, I started raising my hand. The pitch was irresistible on its face: institutional-quality private lending, floating rate income, senior secured collateral, away from the volatility of public markets. What was not to love? Plenty, as it turns out. What I saw then, and what the data is now confirming quarter by quarter, is a market that grew too large, too fast, on underwriting standards that were priced for a world of free money and zero real competition. That world is gone. The bill is arriving.
Let me walk you through what we now know, because the earnings reports that have crossed the tape in recent weeks are telling a story that deserves your full attention, even if the managers reporting those numbers are doing everything in their power to frame it as a non-event.
Start with Ares Capital, ARCC, the largest publicly traded BDC in the country and arguably the gold standard of the sector. When the gold standard starts showing cracks, you pay attention. ARCC reported Q1 2026 results this week and the headline numbers were, as always, carefully packaged. Non-accruals at 2.1% of the portfolio at cost, up 30 basis points in a single quarter. NAV down 35 cents per share, to $19.59. Core EPS of $0.47, below the $0.48 dividend actually paid to shareholders. Management's explanation for the NAV decline: mostly market-driven spread widening, not credit deterioration. Well, that is technically accurate. It is also precisely the kind of statement you make when you want investors focused on the benign interpretation rather than the directional one. A 30-basis-point non-accrual jump in one quarter is not a crisis. It is a signal. And the signal got louder when ARCC's own CEO, Kort Schnabel, told investors on the earnings call that he "would not be surprised to see credit quality and non-accruals across the industry revert closer to historical norms." Read that sentence again. Go on, I can wait. For the record, the banking term of art: “non-accruals,” means borrowers are not paying! The CEO of the largest BDC in America just told you, in plain English, that the good times in private credit are ending. He did not say it to be bearish. He said it to inoculate. There is a difference, and my readers–my faithful ready–you know which one matters more.
ARCC is not alone. Blackstone's non-traded private credit flagship, BCRED, just reported that its NAV has declined for three consecutive quarters, settling at approximately $45 billion at the end of March, down from $47.6 billion at year-end 2025. Non-accruals there rose to 2.4% of the portfolio at cost. The names driving that increase–Medallia and Affordable Care–are not obscure micro-cap wagers. Medallia carried a portfolio mark of 60.3 cents on the dollar. These are real losses hiding behind the language of "weighted average marks" and "improving coverage ratios." BCRED also just experienced the highest redemption quarter in its history, with investors requesting to exit 7.9% of the fund's shares–roughly $3.8 billion–in a single quarter. Blackstone honored all of those redemptions, but it had to upsize its repurchase cap and inject approximately $400 million of its own capital to do it. When the manager has to reach into its own pocket to fund investor exits, that is not a sign of a healthy market. That is a sign of a market under pressure managing optics.
Blue Owl has its own chapter in this story. Investors sought to withdraw a staggering 40.7% of shares from its technology-focused funds and 21.9% from its credit income funds in Q1. Those requests were capped, or gated at the standard 5% quarterly limit, meaning tens of thousands of investors who wanted out were told to get on line. Blue Owl then attempted to resolve the resulting liquidity mismatch by merging one of its vehicles into its publicly traded BDC at terms that would have imposed a roughly 20% haircut on existing investors, triggering a class action lawsuit. Fast forward to yesterday, and Blue Owl's Q1 2026 earnings arrived with headlines designed to soothe: fee-related earnings up 14% year over year, assets under management reaching $314.9 billion, a stock that surged nearly 10% on the news. Co-CEO Marc Lipschultz took to the earnings call to frame the redemption story as a non-event–characterizing it as "headline-driven, not fundamental-driven," and noting that roughly 90% of investors in its credit vehicles elected not to tender at all. That is one of those carefully constructed defenses I mentioned above, and on the surface it is not wrong. But here is what the surface does not tell you: as recently as earlier last month, $5.6 billion in fresh redemption requests forced Blue Owl to place limits on exits from two of its private credit funds. And while management pointed out that portfolio paydowns in one vehicle ran nearly three times the redemption volume–framing this as proof of structural liquidity–what they were really describing is a fund living off loan repayments rather than new capital formation. That, my friends, is not a sign of health. That is a fund in managed retreat. Management acknowledged that the "level of debate around private credit has resulted in elevated industry-wide redemption requests," which is the most honest sentence anyone on that call uttered yesterday. The beat on earnings is real. Blue Owl is a fee machine–which is unarguably a good thing for investors in the common stock. The pressure underneath it, though, is equally real. And when the largest players in the space are spending the first twenty minutes of every earnings call explaining why their redemption numbers are not as bad as they look, that is the market telling you something the headlines will not. 👀
In the meantime, Ares Management restricted redemptions in its Ares Strategic Income Fund to 5% after withdrawal requests hit 11.6% of the fund. Apollo did something similar around the same time. The gates are going up, one by one, across the private credit landscape. This is not a coincidence. It is a pattern.
And then there is the macro artillery that landed in March, when Morgan Stanley's credit strategy team published a note warning that direct lending default rates could surge to 8%, compared to a historical average of 2 to 2.5%, driven primarily by AI disruption of the software sector. Software, as it happens, represents some 26% of direct lending exposure across the BDC universe. That is not a rounding error. It is a concentration risk that was built quietly over the past four years as every private credit manager in America chased the same covenant-lite, sponsor-backed, ARR-underwritten software loans because the yield looked great and the default history was essentially zero. That zero-default history was not evidence of credit quality. It was evidence of a credit cycle that had not yet turned. Um, it is turning now.
What does all of this mean for you as an investor? The first thing to understand is that the bifurcation I warned about last summer is now firmly underway. The largest, most well-capitalized platforms–your ARCCs, your BXSLs–will navigate this period with discomfort but not disaster. They have the balance sheets, the dry powder, and the institutional relationships to work through problem loans without systemic contagion. The smaller and more aggressive lenders, the ones who chased yield in 2024 by moving down the quality curve, are a different story entirely. Investcorp Credit Management BDC just reported non-accruals of 6.9% of its portfolio at fair value, suspended its dividend entirely, and announced that its board has formed a “special” committee to explore strategic alternatives. That, my dear readers, is the polite corporate language for "we are in trouble and looking for a way out." Golub Capital BDC, which reports its fiscal quarter ended December against a backdrop of what management itself called "four structural headwinds". Namely, lower base rates, tighter spreads, muted M&A, and a protracted credit cycle. It cut its base dividend by 9% and warned that public BDC net returns are running approximately four percentage points lower year over year across the sector.
The S&P BDC Index has underperformed the broader market by nearly 15% since the start of the year. PIK (payment in kind) income, which you may remember is the accounting mechanism that lets borrowers pay interest in additional debt rather than cash, making loans look performing when they may not be, was running at 5.3% of total income across publicly listed BDCs as of Q3 2025, already above the 5% threshold that analysts generally flag as an early warning sign. The retail redemption pressure that I flagged months ago as the structural vulnerability of semi-liquid private credit vehicles is now showing up in the actual numbers, with Moody's confirming that perpetual non-traded BDC inflows turned to…wait for it…outflows for the first time in Q1 2026.
Now, it's important to note that none of this means the private credit market is collapsing. This is not the Lehman crisis all over again. It means the private credit market is normalizing, and normalization from a zero-loss fantasy is painful. My position has always been the same: this is not a reason to panic, but it is absolutely a reason to know exactly what you own, who manages it, and whether the yield you are being paid adequately compensates you for risks that may not have been fully disclosed in the marketing materials. The next wave of BDC earnings will add considerably more data points to this picture. Golub Capital BDC reports on May 4. Blue Owl Capital Corporation–the publicly traded BDC, OBDC, which is a separate and distinct animal from the OWL parent I discussed above–reports on May 6. Goldman Sachs BDC reports on May 7. And FS KKR Capital, one of the largest BDCs in the country, rescheduled its results to May 11–which, for what it's worth, is the kind of calendar shuffle that earns a raised eyebrow from at least an old Wall Streeter like me. 🤓 I will be reading every transcript, and I will be back here to tell you what management doesn’t say–but actually says in the footnotes.
YESTERDAY’S MARKETS
Stocks closed sharply higher on Thursday, capping the best month for the major averages since 2020, with the S&P 500 rising 1.02% to a fresh record close and the Dow Jones Industrial Average surging by 1.62%, lifted by a nearly 10% gain in Caterpillar and a 9% jump in Alphabet following strong earnings from both. The Nasdaq Composite added 0.89%, also a record, despite notable declines in Meta and Microsoft. 10-year Treasury yields settled at 4.43% reflecting the Fed's decision Wednesday to hold rates steady. Oil remained a critical variable, with Brent crude closing near $114 per barrel intraday before pulling back to settle around $111, and WTI finishing near $105, both elevated on reports that President Trump was briefed on expanded military options against Iran.
NEXT UP
ISM Manufacturing (April) may have climbed to 53.2 from 52.7.
Next week: more important earnings in addition to Factory Orders, more PMIs, more housing numbers, JOLTS Job Openings, ADP Employment Change, monthly BLS employment numbers, and University of Michigan Sentiment.
Have a great weekend and please call if you have any questions.
Best regards,
Mark