Key Takeaways
- • Ares Management capped redemptions at 5% in its $10.7 billion Ares Strategic Income Fund after withdrawal requests surged to 11.6%, according to a Bloomberg report, one day after Apollo Global Management adopted similar measures in one of its vehicles.
- • Morgan Stanley warned that private credit direct lending default rates could surge to 8%, versus a 2-2.5% historical average, with pressure concentrated in software exposure, estimated at around 26% of direct lending.
- • Morgan Stanley analysts led by Joyce Jiang called an 8% default spike "significant but not systemic," citing lower leverage at private credit funds and business development companies than in 2008.
- • Blackstone's flagship BCRED fell 0.4% in February, its first monthly loss in three years, after marking down loans including debt linked to SaaS company Medallia.
- • Industry participants describe the stress as a potential "healthy reset" and the sector's first major liquidity test across a roughly $3 trillion market.
Summary
Private credit markets are under mounting strain as deteriorating asset quality, collateral markdowns and a rush for redemptions prompt comparisons to the build-up to the 2008 Global Financial Crisis. The roughly $3 trillion sector is facing its first major liquidity test, with several managers moving to limit investor withdrawals.
Ares Management on Tuesday capped redemptions in its $10.7 billion Ares Strategic Income Fund at 5%, after withdrawal requests reached 11.6%, according to a Bloomberg report. The move came a day after Apollo Global Management introduced similar measures in one of its vehicles. Blue Owl Capital and Cliffwater have also halted or restricted withdrawals in recent weeks as default fears have prompted investors to retreat from the sector.
Morgan Stanley recently warned that default rates in private credit direct lending could climb to 8%, well above the 2-2.5% historical average, with stress concentrated in sectors vulnerable to AI disruption, particularly software. Morgan Stanley analysts led by strategist Joyce Jiang described such a spike as "significant but not systemic," pointing to lower leverage among private credit funds and business development companies compared with 2008. Software exposure in direct lending is estimated at around 26% by Morgan Stanley, and fears that agentic AI could disrupt the software-as-a-service model have driven publicly listed SaaS stocks sharply lower. Software is the largest sector in the Apollo Debt Solutions BDC at more than 12%, and Blue Owl is also heavily exposed to SaaS lending.
Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said an 8% default rate would move private credit "from a 'zero loss' fantasy to a more normal credit asset class," calling it painful in spots but a healthy reset that frees capital for stronger businesses. William Barrett, managing partner at Reach Capital, said an 8% to 9% default rate would largely appear as "shadow defaults" such as maturity extensions and covenant waivers, and that payment-in-kind arrangements act as a "release valve" that prevents outright failures while trapping capital in restructurings.
Blackstone's BCRED, which also saw a surge in redemption requests during the first quarter, was down 0.4% in February, its first monthly loss in three years, after marking down several loans, including debt tied to Medallia, according to a Financial Times report. Barrett also flagged highly leveraged healthcare roll-ups and covenant-lite loans as vulnerable, and noted that smaller issuers have recorded a 10.9% default rate.
Brad Rogoff, global head of research at Barclays, said the episode underscores the need to distinguish investment-grade from sub-investment-grade private debt, since the latter typically carries more extreme leverage, often tied to software risk and concentrated in the U.S. Nicolas Roth, head of private markets advisory at UBP, described the redemption wave as the asset class's first real liquidity test "at scale," with default rates "elevated, but manageable," and said the adjustment period will separate platforms with structural liquidity buffers from those relying on subscription momentum.
Ares Management on Tuesday capped redemptions in its $10.7 billion Ares Strategic Income Fund at 5%, after withdrawal requests reached 11.6%, according to a Bloomberg report. The move came a day after Apollo Global Management introduced similar measures in one of its vehicles. Blue Owl Capital and Cliffwater have also halted or restricted withdrawals in recent weeks as default fears have prompted investors to retreat from the sector.
Morgan Stanley recently warned that default rates in private credit direct lending could climb to 8%, well above the 2-2.5% historical average, with stress concentrated in sectors vulnerable to AI disruption, particularly software. Morgan Stanley analysts led by strategist Joyce Jiang described such a spike as "significant but not systemic," pointing to lower leverage among private credit funds and business development companies compared with 2008. Software exposure in direct lending is estimated at around 26% by Morgan Stanley, and fears that agentic AI could disrupt the software-as-a-service model have driven publicly listed SaaS stocks sharply lower. Software is the largest sector in the Apollo Debt Solutions BDC at more than 12%, and Blue Owl is also heavily exposed to SaaS lending.
Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said an 8% default rate would move private credit "from a 'zero loss' fantasy to a more normal credit asset class," calling it painful in spots but a healthy reset that frees capital for stronger businesses. William Barrett, managing partner at Reach Capital, said an 8% to 9% default rate would largely appear as "shadow defaults" such as maturity extensions and covenant waivers, and that payment-in-kind arrangements act as a "release valve" that prevents outright failures while trapping capital in restructurings.
Blackstone's BCRED, which also saw a surge in redemption requests during the first quarter, was down 0.4% in February, its first monthly loss in three years, after marking down several loans, including debt tied to Medallia, according to a Financial Times report. Barrett also flagged highly leveraged healthcare roll-ups and covenant-lite loans as vulnerable, and noted that smaller issuers have recorded a 10.9% default rate.
Brad Rogoff, global head of research at Barclays, said the episode underscores the need to distinguish investment-grade from sub-investment-grade private debt, since the latter typically carries more extreme leverage, often tied to software risk and concentrated in the U.S. Nicolas Roth, head of private markets advisory at UBP, described the redemption wave as the asset class's first real liquidity test "at scale," with default rates "elevated, but manageable," and said the adjustment period will separate platforms with structural liquidity buffers from those relying on subscription momentum.
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