Private Credit: Growth, Redemptions and the Fear of a Liquidity Crunch

Private credit has moved from a niche institutional allocation to one of the fastest-growing areas of global finance.

In 2015, the market was around $600 billion. By 2025, Goldman Sachs figures put it closer to $2.5 trillion. That growth has been driven by banks pulling back from parts of corporate lending, private equity sponsors needing flexible financing, and investors searching for higher yields than those available in traditional public credit markets.

The basic appeal is clear. Private credit offers floating-rate income, direct negotiation with borrowers, tighter covenants than broadly syndicated loans in some cases, and a potential illiquidity premium. But the recent concern is whether the asset class has grown too quickly, especially as more wealth investors have entered through semi-liquid vehicles.

That is where the fear of a “run” comes in.

Traditional private credit funds are usually closed-end. Investors commit capital for several years and cannot simply pull money out when sentiment changes. That structure matches the assets well: illiquid loans are funded by locked-up capital.

The newer wealth-channel products are different. Business Development Companies, interval funds and evergreen vehicles offer private credit exposure with some form of periodic liquidity.

This has helped high-net-worth and retail investors access an asset class that was once largely reserved for institutions. But it also introduces a tension: the assets are still private and illiquid, while the investor base increasingly expects liquidity.

This is the key structural issue.

If a fund owns private loans that cannot be sold quickly without a discount, but investors request withdrawals at the same time, the fund needs a liquidity mechanism. Most semi-liquid products deal with this by capping redemptions, often around 5% of NAV per quarter. That is not a failure of the structure; it is the structure doing what it was designed to do. But when redemption requests exceed the cap, headlines start to talk about “gates”.

Recent examples show why investors are paying attention.

BlackRock’s HPS Corporate Lending Fund, a roughly $25 billion non-traded private credit vehicle, received redemption requests equal to 13.3% of shares in the first quarter of 2026, but agreed to repurchase around 5%, or roughly $620 million. Across eight large vehicles reviewed by Reuters, first-quarter redemption requests totalled around $7.1 billion, the highest in the dataset. Blackstone’s BCRED also faced elevated redemption pressure, while Ares disclosed that redemption requests in one wealthy-investor fund reached around 11% of assets.

This does not mean private credit is facing a banking-style run. The difference is that investors cannot all redeem at once. The caps prevent forced selling. However, it does show that the wealth channel is more sentiment-sensitive than the institutional channel.

The other concern is credit quality.

Business Development Companies, or BDCs, have become one of the main ways investors access private credit. According to BIS research, BDCs now have over $300 billion in assets and represent around 20% of the US private credit market. These vehicles can provide attractive income, but their dividend quality is now being tested.

Reuters recently reported that the median BDC dividend coverage ratio fell to 0.99x in Q1 2026. Excluding payment-in-kind interest, or PIK, coverage dropped to 0.89x. That matters because PIK is non-cash income. Instead of the borrower paying cash interest, the interest is added to the debt balance. It can be useful in temporary situations, but rising PIK can also hide borrower stress.

This is where the private credit debate becomes more serious.

The issue is not only whether investors can redeem. It is whether reported income, valuations and default rates fully reflect the pressure on borrowers. Fitch data points to US private credit default rates around 6% in 2026, meaning stress is clearly rising from the very low levels seen during the cheap-money period.

Private credit is therefore facing two tests at the same time.

First, can semi-liquid vehicles manage redemption demand without damaging the return profile?

Second, can managers continue to deliver attractive income if defaults, PIK usage and refinancing pressure rise?

There is also a return dilution issue. If private credit funds need to hold more cash or liquid assets to meet redemption requests, returns may be watered down. The more liquidity a fund promises, the less purely “private” the portfolio may become. Holding liquidity sleeves, public loans, cash or more easily saleable assets may help manage withdrawals, but it can reduce the illiquidity premium investors originally came for.

That is the trade-off.

Investors want private market returns with public market liquidity. But those two things are naturally in conflict.

Fund managers argue that the fears are overstated. They point out that most private credit vehicles do not have the same asset-liability mismatch as banks. Closed-end funds cannot be run in the same way a bank can. Even semi-liquid funds have redemption caps, which are designed to avoid forced selling. Goldman Sachs has argued that widespread systemic risk appears limited because the market is diversified, leverage is relatively contained, and liabilities are generally better matched to assets than in the banking system.

That is probably right at a system-wide level.

But it does not mean there will be no pain.

The more likely outcome is not a 2008-style collapse. It is a period of performance dispersion. Strong managers with conservative underwriting, senior secured exposure and diversified portfolios should be better placed. Weaker managers, aggressive lenders and vehicles reliant on constant inflows may struggle.

Private credit is not broken. But the easy phase is over.

The next stage will test whether investors truly understood what they were buying: an illiquid credit asset, not a high-yield savings account with quarterly liquidity.

DISCLAIMER:

This is an opinion piece on market conditions and is not meant to act as investment advice but rather as an educational piece and critial thinking