The U.S. private credit industry is bracing for a period of increased borrower defaults, according to several brokerages, revealing vulnerabilities in what had previously been a favoured trade on Wall Street. While this recent industry strain is unlikely to trigger a widespread crisis, analysts anticipate a moderation in growth, particularly as artificial intelligence disrupts software companies, which constitute a significant portion of private credit portfolios. The industry serves as a crucial funding source for small to medium-sized businesses considered too risky for conventional lenders.
The latest blow to the industry occurred when Blue Owl (OWL.N) limited investor withdrawals from two of its retail-focused funds, causing its shares to plummet by as much as 8.6% to a record low. Blue Owl is an alternative asset manager that provides financial solutions. Other alternative asset managers such as Apollo Global, Blackstone, Ares Management, KKR, and Carlyle Group also experienced declines between 3.6% and 5.5% earlier in the session, though most pared their losses following renewed hopes of a reopening of the Strait of Hormuz.
Concerns regarding credit quality began to surface in recent months, sparked by the bankruptcy of auto-parts supplier First Brands. Additionally, the decline in valuations of software companies, driven by fears of AI disruption, has exposed vulnerabilities stemming from the industry’s concentration in private credit portfolios. According to Morgan Stanley, private credit accounted for approximately 30% of the U.S. leveraged finance market in 2025, a significant increase from 13% a decade prior. Investment giants have lost a combined $132 billion of market value this year.
Analysts at Barclays noted that many private credit funds have become heavily concentrated in specific sectors, particularly software, and that the rising risk of software companies becoming obsolete increases the probability of default. Morgan Stanley anticipates annual private credit defaults of 8% between the second half of 2026 and the first half of next year, primarily driven by stress in software companies. The wave of redemption curbs could intensify scrutiny of similar investment vehicles and raise questions about valuation, transparency, and liquidity risk.
