Redemptions are rising, loan quality is slipping, and private credit managers are feeling the heat. This is what the road ahead may look like.
KEY TAKEAWAYS
Private credit markets are experiencing increased stress driven by rising redemption requests and liquidity constraints. Recent events are part of a broader trend rather than isolated cases.
S&P Global Ratings revised the outlook on the Cliffwater Corporate Lending Fund from stable to negative while maintaining its A rating. The change occurred within four months of the prior rating affirmation.
Redemption requests increased from 5.3% of assets in Q4 2025 to nearly 14% in Q1 2026. The fund met 7% of requests, leaving a portion of investors waiting for future redemption windows.
Approximately 85% of fund assets are invested in senior secured loans to middle-market companies. Sector exposure includes roughly 21% in technology and 16% in healthcare.
Payment-in-kind (PIK) loans have increased across private credit markets from about 5% in 2022 to over 11% by the end of 2025. “Bad PIK,” where borrowers switch from cash interest to PIK, has reached 6.4% of exposure.
MY HOT TAKES
Recent developments reflect tightening liquidity conditions within private credit structures. Redemption demand is exceeding available liquidity under current fund frameworks.
The shift in S&P outlook indicates increased forward-looking risk tied to redemption pressure and portfolio conditions. The pace of the change suggests accelerating concerns.
Exposure to software and technology borrowers introduces additional risk due to changing competitive dynamics and margin pressure. Underwriting assumptions tied to recurring revenue are being challenged.
Growth in PIK loan usage indicates reduced borrower capacity to service debt with cash flow. Loan performance classifications may not fully reflect underlying financial stress.
Market stress is likely to differentiate managers based on balance sheet strength, portfolio quality, and liquidity management.
You can quote me “The private credit fire is still contained, but it is no longer theoretical.”
Where there’s smoke. I know that it's kind of cliche, but my long-time followers know that I have this one etched into my trusty Wall Street Sayings notebook. I can say with confidence that on Wall Street, where there is smoke, there is usually fire. How do I know this? Well, the same way any of my colleagues who have spent almost 4 decades in the business (as I have)--the singemarks on my lower extremities. 🤣
Today I would like to add an asterisk to that one: on Wall Street, where there's fire, there is pain. So, what's all this stuff about smoke, fire, and pain? Before I get into it, I want to just make it clear that I am not laying out these cracks in the foundation to scare you. Being successful at long-term investing is influenced by one's ability to navigate through challenging terrains and climates. To be a successful navigator, one needs to know what's coming up on the road. Understanding these potential pitfalls and changes in weather patterns is how you do it. There are no guarantees, but following these narratives will certainly increase your probability for success, which, on Wall Street, is exactly how you win. Let's hit the road. Buckle up.
Last week I highlighted the growing storm in the private credit markets. It was not the first time I brought it to your attention. Nope. I wrote about it last year and have been quite public with my views on the topic. A few weeks back, Market Financial Solutions–a UK-based mortgage lender funded by some of the biggest names on Wall Street, including Barclays, Apollo, and Jefferies –collapsed into insolvency amid allegations of fraud and the double-pledging of collateral. It wasn't the first, but it was certainly emblematic of the broader challenge facing private credit. Complicated deal structures combined with decaying financial strength of lower-quality portfolio companies are the conditions that get the "brush fire warning." If you add in a surge in redemption requests, you pour an accelerant on top of already dangerous conditions. Now add in a bit of market anxiety and you get the catalyst necessary to turn it into a dangerous wildfire.
And then the war in Iran lit a different kind of fire entirely. It has, on one hand, caused a diversion from the brewing problems with private credit investors, and on the other hand increased anxiety and likely caused a ramp-up of redemption requests either directly or indirectly. We have a fire–a contained fire. Just yesterday, news hit the tape about Cliffwater.
Cliffwater runs what is called an interval fund–the Cliffwater Corporate Lending Fund, ticker CCLFX–with roughly $32 billion in assets. S&P Global Ratings just changed the outlook on that fund from stable to negative. Now, I want to be precise here because the language matters. S&P did not downgrade the fund's credit rating, which remains at A. What they did was something more telling in some ways. They looked at what is happening inside the building, weighed what they saw, and changed the forward-looking view. Four months ago, in November of 2025, S&P gave this same fund its A-rating with a “stable” outlook and called it a triumph for the interval fund industry. Four months later, the outlook is “negative.” That is a fast reversal, and on Wall Street, fast reversals tend to mean something. 👀
What did S&P see that spooked them? The redemption math. In the fourth quarter of 2025, investors requested to pull 5.3% of the fund's assets. That's elevated but manageable. Then in the first quarter of 2026, that number exploded to nearly 14% of net asset value. That’s nearly triple the prior quarter! The fund is structured as an interval fund, which means it is required to honor up to 5% in redemptions per quarter, with discretion to go as high as 7%. Cliffwater chose the maximum of 7% for the second consecutive quarter. The math that follows is simple and, actually, a bit sobering: investors tried to pull 14%, got back 7%, and the other half is now standing in line waiting for next quarter's window. S&P's warning was explicit. If that 7% payout becomes the new normal and not the exception, the fund faces increasing liquidity strain and a potential full credit downgrade.
Let me tell you what is actually inside this fund, because that is where the real story lives. About 85% of CCLFX's total assets are invested in senior secured loans to middle-market companies. The two largest sector exposures are technology, at roughly 21%, and healthcare, at about 16%. That technology number is the one that should get your attention. Nearly a quarter of the entire portfolio is concentrated in software and tech companies. You know, exactly the companies that are now squarely in the crosshairs of artificial intelligence disruption. To be clear, these were not reckless loans when they were made. Software companies with recurring subscription revenues and sticky customers were considered ideal private credit borrowers. Predictable cash flows, low capital intensity, and defensible business models. The problem is that AI is now challenging every one of those assumptions. When an enterprise customer can automate a workflow with an AI agent instead of renewing a software subscription, renewal rates compress. When a software company has to invest heavily to rebuild its product around AI just to stay competitive, margins shrink. Debt that was underwritten on the old assumptions now sits on top of a business model that is being actively dismantled.
Making things more complicated is what is happening under the hood with a category of loans called payment-in-kind, or PIK. A PIK loan is one where the borrower cannot pay interest in cash, so instead the interest gets added to the principal balance. The loan stays classified as “performing.” The borrower does not default. But the cash is not flowing, and the debt is quietly growing. Across the private credit market, the share of loans on PIK terms has risen from about 5% in 2022 to over 11% by the end of 2025. What analysts are calling "bad PIK"--situations where a previously cash-paying borrower switched to PIK mid-loan–has reached 6.4% of total private credit exposure. These are the zombie loans. They look fine in a filing. They do not look fine if you have to sell them in a hurry.
And Cliffwater is, in fact, trying to sell some of them. According to reporting from PitchBook, the fund is currently in the market with a roughly $1 billion secondary sale of first-lien loan positions. They hired investment bankers at Evercore to run the process. Let me say that plainly: Cliffwater is simultaneously capping what investors can take out the front door while trying to quietly sell loans out the back. That–to me at least–is not confidence. That is triage. And it is exactly the kind of dynamic that rating agencies are paid to notice, which is why S&P acted when they did.
This is not a Cliffwater-only story, and I want to be clear about that because the average investor needs to understand the scope. BlackRock's HPS Corporate Lending Fund hit its 5% redemption cap after investors requested 9.3%. Morgan Stanley's North Haven fund honored less than half of redemption requests, returning roughly $169 million against demands for nearly 11% of shares. Blackstone, to its credit, honored a record 7.9% of redemptions from its BCRED vehicle, but only by having senior executives inject roughly $400 million of their own capital to make it work. Blue Owl permanently halted redemptions at one of its funds. If you are an investor in these types of companies, it's time to do some homework. The names to look at closely include Ares Capital, Blue Owl Capital, Prospect Capital, and FS KKR Capital. These are all BDCs with significant middle-market software exposure that face the same structural pressures Cliffwater is navigating right now. Seek information about redemption caps, PIK loan percentages, and software sector concentration. If you are having trouble finding information, that is itself, er, information.
Now, as a bonus, I will add a second asterisk to that adage in my Wall Street Notebook, and here it is. On Wall Street, where there's pain, there is opportunity. The same stress that is shaking out the weaker structures in private credit is creating entry points for investors with patience and selectivity. The managers with the strongest balance sheets, the most conservative loan books, and the least software concentration are going to emerge from this period with larger market shares and better pricing power. Private credit as an asset class is not going away. The need it fills by lending to companies that banks no longer serve, is structural and durable. What is changing is who deserves to do it and who was simply riding the wave of easy money and retail enthusiasm. The fire burns away the brush. What grows back tends to be stronger. That is not doom and gloom. That is how markets work. And knowing that it is coming–knowing what is on the road ahead–is exactly why you are here every day. Eyes on the road–both hands on the wheel.
YESTERDAY’S MARKETS
Yesterday the Dow dropped to its lowest close of 2026 while the S&P 500 slid by -1.36%, and the Nasdaq fell by -1.46%, with all three indices hitting fresh year-to-date lows. The Fed held rates steady in a range of 3.5% to 3.75% and the market did not like what it heard (even though it was largely expected), as Powell's commentary on persistent inflation effectively took rate cuts off the table for the foreseeable future. Brent crude was trading around $110 a barrel, with oil continuing its Iran war-driven surge and adding a stagflation undercurrent to an already anxious tape. The VIX jumped over 12% to close at 25, a level that tells you traders are not just nervous, they are buying protection.
NEXT UP
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Leading Economic Index (January) probably slipped by -0.1% after declining by -0.2% In December.
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