Private credit is being stress-tested by war, inflation, weak software credits, and investors who suddenly want cash back.
KEY TAKEAWAYS
Private credit stress is no longer isolated. Morgan Stanley joined Blue Owl, BlackRock, and Cliffwater in limiting investor withdrawals, which suggests the pressure is spreading across the asset class.
The core problem is liquidity mismatch. Investors are promised periodic exits, but the underlying assets are illiquid private loans that cannot be sold quickly without taking discounts.
JPMorgan’s reported markdown of certain private-credit-linked collateral matters because it hits the back-leverage mechanism. That reduces borrowing capacity and can intensify pressure across the system.
Good loans can get hurt alongside bad ones in a redemption cycle. Forced selling does not care whether the asset is healthy; it only cares whether it can raise cash.
The riskiest bucket may be the “not dead yet” borrowers. These life-support credits can survive with time, but a redemption wave can force repricing before they get the chance.
MY HOT TAKES
The real danger is not simply defaults. It is the feedback loop between redemptions, forced sales, lower marks, and then more redemptions.
Private credit itself is not inherently broken. The structure becomes dangerous when investors treat an illiquid strategy like an ATM with a quarterly window.
Wall Street knew more about these risks than it admitted. The JPMorgan eyebrow-raiser is your signal that the smart money has been watching this mess build for a while.
Software exposure is a major underappreciated risk. AI is not just a tech story here; it is a credit story because it can impair business models lenders underwrote only a couple of years ago.
The war and oil shock may have distracted markets from a credit problem that was already brewing. In classic market fashion, the fireworks got the headlines while the plumbing kept leaking.
You can quote me: “When a fund manager has to sell assets to meet withdrawal requests, the life support patients are the first to get unplugged.”
Another one bites the dust. It seems like a lifetime ago, but it was just about two weeks ago that I headed to our Miami office for a few days of important meetings. Even though my days were packed with work, it wouldn’t be too bad to have the Miami skyline in the background–a much-needed change of scenery from my beloved, but far-greyer-than usual New York City. I must have forgotten to share my schedule with the White House, and the scheduling of the first strikes on Iran would come just as I headed to the airport.
I showed up to all those important meetings, but they took second seat to the rush of activity that would really fill my entire time in Florida. Was it Wednesday or Tuesday–I don’t even remember, but I do remember excusing myself from a meeting and stepping out onto the balcony to speak with a journalist. We talked about the war, the Strait of Hormuz, inflation, interest rate expectations, crude oil–you know the usual suspects. This particular journalist–one of my favorites–focuses on fixed income, so we were able to–for a refreshing minute–talk about not-stocks. I told her that the war would divert attention from some new hotspots in private credit that showed up on my radar in the days leading up to the Iran attack.
I was referring to the Market Financial Solutions, a London firm funded by private equity that had been placed into administration (the UK version of bankruptcy) just days before the Iran conflict. I wrote about it (https://blog.siebert.com/the-hidden-exposure-in-your-safe-stocks) and did a few videos about it, but cruise missiles and explosions are far more interesting than a major credit implosion that exposed the likes of Barclays, Apollo, Jefferies (ya–them, again), Wells Fargo, and Santander. My thesis was then–as it was last year–and remains today. Lots of too-hot dollars chasing too few quality borrowers leads to less-than-prudent lending practices. We have seen it before–trust me. I ended the call by saying something like “we will be talking again about this in the weeks to come.”
So here we are approaching the 2-week mark on the Iran conflict which has been more than enough to send the markets into a crazy spin cycle, and those smoldering hotspots have not only gone away, but they seem to have multiplied.
Just yesterday, we learned that Morgan Stanley became the latest name to cap investor redemptions at one of its private credit funds. The North Haven Private Income Fund which has nearly $8 billion in assets, returned roughly $169 million to investors this quarter. That sounds like a big number until you realize investors were asking for almost 11% of shares outstanding, and the fund only honored about 46% percent of those requests. The rest? DENIED. Capped at 5%. Sorry, the exits are full. Please remain seated.
Now,if that were an isolated incident, maybe you brush it off. Maybe you chalk it up to one fund having a bad quarter. But, as we know, it is not isolated. Not even close. Blue Owl permanently halted redemptions at its OBDC II fund last month–permanently–after withdrawal requests surged 200% (I wrote about that here: https://blog.siebert.com/cockroaches-2.0). BlackRock restricted redemptions from a flagship debt fund after it disclosed elevated redemptions from BCRED. And Cliffwater, which runs a $33 billion private credit vehicle, capped its own redemptions at 7% after investors tried to pull a record amount. My regular followers know that I have been writing about this risk since last year. I told you where the cracks were forming. And now the cracks are turning into fault lines.
But before I get into what I think is really happening underneath the surface, I want to walk you through some of the plumbing. Because if you do not understand how your dollar moves through this system, you cannot understand why the exits being sealed shut can be such a problem.
When you invest in a private credit fund, your money does not sit in a vault somewhere waiting for you. It gets lent out directly to companies. Mostly middle-market firms. Software companies. Healthcare operators. Businesses that cannot or do not want to go through traditional bank lending channels. These are not publicly traded bonds you can sell on an exchange by simply mashing on the “sell” button. No. These are bespoke loans, which are illiquid by design, and the fund managers will tell you upfront: this is a feature, not a bug. The illiquidity premium is what earns you the higher yield! That is basic finance–we get it. 😉 But here is what they do not say in the slick brochures: when too many investors want their money back at the same time, the fund has to choose between selling those loans at a discount–potentially a steep discount–or telling investors to wait. 🕜 Most of these funds have quarterly redemption gates, typically around 5% of net assets. In normal times, nobody notices. In abnormal times, those gates become prison walls.
Pay attention, this is where it starts to get funky. Another layer that most people are missing entirely. JPMorgan–the largest bank in America–just marked down the value of loans it holds as collateral from private credit firms. Go ahead and read that again. These are the loans that private credit managers use as collateral to borrow more money from banks, in what is called back-leverage. Leverage on top of leverage. When JPMorgan marks down that collateral, it reduces how much private credit firms can borrow. In some cases, it forces them to post more collateral. Jamie Dimon reportedly told investors the bank was being more prudent in lending against software assets. And another JPMorgan executive was quoted saying–and this is where my right eyebrow raises noticeably–he was shocked that people are shocked. That is Wall Street for: we have been watching this train wreck in slow motion and we decided to get off the tracks. The question is whether everyone else can move fast enough to do the same.
Ok, now where do we go from here? I think it breaks down into three buckets.
The first bucket is the good companies. These are the borrowers in private credit portfolios that are doing fine. Revenue is growing. Cash flow covers the interest payments. The business model is intact. In a normal environment, these are exactly the kind of credits you want to own. And they will be fine… as long as the redemption wave does not force fund managers to sell performing loans at distressed prices just to generate cash. That is the cruel irony of a liquidity crisis. The good assets get liquidated alongside the bad ones because the fund needs the cash, not because the credit has deteriorated, and that is an important thing to note. If you have ever watched a fire sale at a department store, you know the Rolex goes out the door at the same discount as the knockoff–not that anyone ever got a Rolex on sale. That is what forced selling looks like in illiquid, private credit.
The second bucket is the bad companies. These are the credits that were already in trouble before the redemption wave started. Maybe the business model was eroding. Maybe, AI started eating their lunch. That is the big one right now. Software companies that lenders were perfectly happy to fund two years ago are suddenly looking vulnerable because an AI model can do in five minutes what their product took five employees to accomplish. Bloomberg reported that filings from 7 major private credit firms showed at least 250 software investments that were recategorized under different sectors, raising questions about whether the true exposure to this risk is even being properly disclosed. These are the loans JPMorgan is marking down. These are the credits that fund managers were quietly planning to work out over time–restructure here, write down a little there, maybe merge two portfolio companies and hope nobody looks too closely at the math. To be crystal clear, that is completely normal and well understood. In normal times, that playbook works. In normal times, nobody is pounding on the door demanding their money back!
That brings us to the third bucket–and this is the one that keeps me up at night. This bucket contains the companies on life support. Not dead. Not dying. But not exactly thriving either. These are the borrowers that are making their interest payments, barely, often through PIK toggles (PIK stands for payment-in-kind), which is a fancy way of saying the interest gets paid in more debt rather than cash. The Department of Justice has reportedly issued warnings about what they are calling shadow defaults, which are restructurings dressed up in creative accounting that let everyone pretend the loan is performing when it is really just a zombie. Left alone, most of these companies would probably survive. They would work through the rough patch. The economy would recover, or they would find a new business line, or they would get acquired by someone with deeper pockets. Time heals a lot of wounds in credit markets. But the redemption wave is not giving them time. When a fund manager has to sell assets to meet withdrawal requests, the life support patients are the first to get unplugged. They are too weak to fetch a good price but too expensive to carry on the books when you are scrambling for liquidity. And that is where the real mayhem starts. Because one forced sale becomes a pricing benchmark. And that benchmark reprices every other similar loan across the industry. And suddenly what was a manageable situation for twenty different funds becomes a mark-to-market reckoning that nobody budgeted for.
This is the dynamic that should concern you. It is not that private credit is inherently broken. It is not. At its core, private credit fills a real need in the economy. Companies need capital. Banks have pulled back. Private lenders stepped in. That is how markets work. The problem is what happens when the instrument that was designed to be held to maturity suddenly has to be liquidated mid-stream because investors lost confidence, and confidence, once lost, has a way of accelerating the very outcome everyone was afraid of. More redemptions lead to more forced sales. More forced sales lead to lower marks. Lower marks lead to more redemptions. It is a feedback loop, and once it starts spinning, it is very hard to stop.
It is too early to know how this ends. What I do know is that a $3.5 trillion market that was built on the assumption of patient capital is now being stress-tested by impatient investors, declining software valuations, a war in the Middle East that is driving up energy costs and squeezing margins, and a Federal Reserve that cannot cut rates to bail anyone out because inflation is still above target. The Fed is stuck. The fund managers are stuck. And the investors who want their money back are… well, also stuck behind a gate that says 5% per quarter, best of luck.
I have been saying this since last year. Where there is smoke on Wall Street, there is usually fire. And right now, I am catching some whiffs of it.
YESTERDAY’S MARKETS
Stocks had another tough run yesterday, weighted down by the reality that Iran has leverage in its ability to threaten the Strait of Hormuz–this ain’t gonna’ be easy and certainly not quick. Crude rose and stocks didn’t like that.
NEXT UP
Personal Income (January) is expected to have grown by 0.5% after climbing by 0.3% in the prior month.
Personal Spending (January) probably increased by 0.3%, slower than the prior period’s 0.4% gain.
PCE Price Index (January) is expected to come in at 2.9%, same as December.
GDP (Q4) is expected to come in at 1.4% in line with its last estimate.
University of Michigan Sentiment (March) may have slipped by 54.8 from 56.6.
JOLTS Job Openings (January) were likely at 6.75 million, slightly more than December’s 6.542 million vacancies.
Next week’s headline event will be the Fed’s FOMC meeting, but we will also get some more housing numbers, regional Fed reports, The Leading Economic Index, Durable Goods Orders, Factory Orders, and Producer Price Index / PPI. Check back in on Monday for your weekly calendars–your chance to be an investment rockstar.