Following a period of attractive growth, the private credit market has recently come under pressure amid a slew of negative headlines, raising concerns that the asset class is experiencing worsening distress. However, the headlines are hardly representative of the market, which continues to perform well, with risks broadly remaining isolated among a subset of larger lenders and loans.
In fact, the headline-driven uncertainty could create a constructive setup for lenders over the next six to twelve months, especially as spreads have widened modestly. For investors with an eye toward the lower- and core-middle-market segments, the opportunity should be further supported by robust earnings growth, generally declining leverage, and improving interest coverage.
The media spotlight has focused on a few high-profile defaults in the broadly syndicated loan market, along with a wave of redemption requests, as signs of potentially widening cracks within private credit. Given the market’s relative opacity, emerging risks can be difficult to monitor, intensifying investor scrutiny. Overall, the two major areas of uncertainty relate to valuations and exposure to AI-related risks:
Valuations: The fair value of private credit loans is determined by lenders through valuation techniques verified by independent third-party firms. Related to this, fears have emerged that these valuations may be more generous than what the underlying loan performance would suggest. These concerns have been most acute among Business Development Companies (BDCs), a type of investment structure that allows investors access to private credit. Historically, BDC valuations have proven more conservative than realized outcomes. Yet underpinning concerns is some lenders' sudden and significant shift of certain loan valuations with the underlying loans moving from ‘performing’ to ‘distressed’ within a single reporting period. This dynamic adds a layer of uncertainty for investors, as they see to understand if any valuations are elevated relative to the true underlying risks of a loan. A point to note is that there can be credit events that may somewhat abruptly alter the outlook and valuation for a company and its debt; this happens often in the public credit market.
AI exposure risks: Private credit inflows accelerated in 2021, coinciding with a surge in software M&A activity. As lending activity clustered in the sector, software accounted for more than 40% of large-format loans (loans over $1 billion) issued during the period. That concentration has become a greater concern as AI raises the risk of technological obsolescence across certain software segments. The risk is compounded by the asset-light nature of many software businesses, which can leave lenders with lower recovery values in periods of distress.
Though emerging risks in the private credit market should be monitored, especially regarding valuation issues and AI exposure, the overly negative headlines are hardly representative of the state of the entire market. What’s actually happening is increased bifurcation of outcomes across different segments of the market. There is an important distinction between the large-cap segment, where most of the stress is concentrated, versus other smaller segments. In essence, large lenders who’ve deployed concentrated levels of capital through their BDCs and other structures over a specific period or vintage are amplifying overall market risks.
Lenders: size problem
The lender-side stress in private credit is largely a function of scale. In recent years, large lenders raised capital aggressively, even as the pool of attractive opportunities in their segment of the market failed to expand at the same pace. As a result, the largest 25 lenders, based on capital flows, increased their market share from less than 40% in 2019 to more than 60% in 2025.
That growth created pressure to deploy capital quickly and at scale, particularly in the large-cap, upper-middle-market, and broadly syndicated segments. With competition intensifying, underwriting standards seemed to have weakened for some lenders, and lenders accepted less favorable terms, looser investor protections, and more borrower-friendly structures, including covenant-lite loans, payment-in-kind interest toggles, and annual recurring revenue-based (ARR) underwriting.
The result was a drift toward larger loans that historically oftentimes would have been financed in the public credit markets. These deals often carried higher leverage, lower yields, and less structural cushion for investors. They also left large lenders with meaningful exposure to software borrowers—often 20% to 30% of their loan books—where revenue-based underwriting can leave loan performance especially vulnerable to a slowdown in growth.
Loans: vintage problem
Most of the distress currently emerging in private credit is tied to loans originated in 2021, when an unusual mix of conditions weakened underwriting discipline across some lenders. Extremely loose fiscal and monetary policy, combined with a rapid expansion of new private credit supply—particularly from large lenders—created a borrower-friendly market in which lenders had to compete more aggressively to put capital to work.
That environment was further complicated by unusually poor visibility into normalized business performance. With the economy still emerging from the pandemic and supply chains continuing to distort the balance of goods supply and demand, cash-flow projections were especially difficult to underwrite. As a result, even strong businesses were sometimes financed with too much debt for their eventual earnings profile.
The risks attracting attention in private credit are real, but they appear concentrated in specific parts of the market—particularly among larger lenders and certain older vintages originated when financing conditions were more borrower-friendly. Outside those areas, the broader fundamental picture looks more resilient than the headlines suggest.
Default trends support that view. Private credit default levels remain below long-term averages and consistent with broader trends in public high-yield corporate bonds. Payment-in-kind interest accruals have also declined and appear to be stabilizing, suggesting that borrower stress is not broadening meaningfully.
Middle-market fundamentals also appear healthier today than during the period when many of the problem loans were originated. Revenue and earnings growth remain solid, while underwriting standards have tightened. New transactions are generally being funded with a more cautious approach to leverage, with loan-to-value ratios now consistently below the 60% levels seen before the global financial crisis. In the lower-middle market, leverage is even more conservative, with loan-to-value ratios often below 40%.
AI may still prove disruptive for certain software borrowers, but its impact should be more nuanced across the broader middle market. Many non-tech businesses may benefit from AI-enabled cost efficiencies without facing the same risk of technological obsolescence. Local service businesses—such as daycares, automotive collision repair shops, plumbing, electrical, and other residential or consumer services—remain rooted in recurring, everyday demand. These businesses also tend to generate stable free cash flow to support debt payments, making them less exposed to the AI-related risks facing parts of the software sector.
Headline-driven concern has created a more cautious tone across private credit, particularly after several large funds gated redemptions. But the more important takeaway is not that risk is rising everywhere; it is that dispersion is increasing. The recent stress appears concentrated in specific parts of the market, while other segments continue to benefit from healthier fundamentals, tighter structures, and more conservative leverage.
That creates a more favorable environment for selective lenders. As the balance of power shifts back toward capital providers, lower- and core-middle-market loans appear especially well positioned. In these segments, deal terms and investor protections are generally stronger, leverage is lower, and earnings growth remains solid. Combined with modestly wider spreads and today’s higher rate environment, the next vintage of loans may offer more attractive risk-adjusted yields than the headlines suggest.
Overall, private credit risks deserve close monitoring. But for investors able to distinguish broad-market noise from segment-specific stress, the current dislocation may present a stronger entry point, not a reason to step away from the asset class.
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