How to Invest in Private Credit: What the Headlines Are Getting Wrong About the Selloff
Written By: Ryan Morrison
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Private credit delivered the returns investors expected through 2024. Then came a cascade of headlines: a high-profile bankruptcy, a fund wind-down, redemption queues at several of the largest managers. Investors began pulling capital at rates that triggered quarterly gates for the first time in the asset class's modern history. The question most allocators are sitting with is not whether something happened. Something clearly did. The question is whether what happened reflects the loan book, or something else entirely.
Katie Fowler is a principal at Blue Owl Capital, one of the named institutions at the center of the redemption headlines. This conversation was recorded during the active cycle, not retrospectively. What she describes is specific, technical, and harder to find anywhere in the public narrative on this topic.
TL;DR
The 2025 private credit redemption cycle is driven primarily by investor sentiment and liquidity structure misunderstanding, not deterioration in underlying loan performance
Falling absolute yields reflect Fed rate cuts and spread normalization; both are credit-positive conditions, not signs of underwriting problems
Software represents approximately 20% of the direct lending market, but most of that exposure is to large PE-sponsored enterprise companies, not early-stage SaaS
Redemption gates are structural protections designed for exactly this scenario; a spike in redemption requests is not the same as a spike in defaults
The most important evaluation dimensions are manager scale, loan-level structure, vehicle liquidity mechanics, and fee transparency, not headline yield or news cycle
Table of Contents
Why Private Credit Became a $2 Trillion Asset Class
Private credit filled the void left by post-GFC banking regulations that made it prohibitive for traditional lenders to hold leveraged loans on their balance sheets. Before the financial crisis, direct lending served primarily smaller, founder-owned businesses without conventional bank access. The post-2008 opportunity was something different: becoming a replacement for the bank syndicate on large leveraged buyout transactions.
The regulatory changes that followed the crisis imposed meaningful capital charges on banks holding leveraged lending risk. A major institution approached for a billion-dollar LBO financing could help underwrite the deal, engage rating agencies, build a syndicate of third-party buyers, and run the roadshow. It was increasingly unwilling and unable to hold that risk on its own balance sheet. Blue Owl, which manages over $150 billion in credit assets today, can. That certainty of execution is what borrowers pay the spread for.
The Post-GFC Share Shift
The growth of private credit is not primarily a story about new lending that would not otherwise have happened. It is a story about share shift. Direct lending is now approximately 25% of all below-investment-grade US corporate credit in the United States. The bulk of that growth came from deal flow that previously went through high yield bond markets and broadly syndicated loan markets, particularly during periods like 2022 and 2023, when equity and fixed income volatility spooked banks and third-party syndicates into pulling back. Private credit stepped in, took share, and grew alongside that withdrawal.
That framing matters for evaluating the current moment. A market that largely displaced bank lending is a different risk profile than a market that inflated new lending that never should have existed.
Why Borrowers Pay the Spread
The premium a borrower pays for private credit reflects a premium service model. Banks offer execution help but limited balance sheet commitment. A scaled private lender offers certainty: the deal closes on the agreed terms, on the agreed timeline, with a single counterparty that will be there for the life of the loan. For a PE sponsor managing a time-sensitive acquisition, that certainty has real value. It is why the spread exists, and it is why it has persisted even as competition has increased.
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How Private Credit Loans Are Structured
Private credit loans are primarily first-lien, floating-rate, senior secured instruments made to PE-sponsored companies, with covenant protections and equity cushions that reduce loss severity when defaults occur. Understanding this structure is the prerequisite for reading any headline about the asset class intelligently.
First-lien position means the lender is first in line for repayment in any default or liquidation scenario. In practice, this matters more than the default rate headline does. A loan can default and still recover most or all of its principal. The relevant metric is not default rate alone but loss-given-default; for first-lien, senior secured instruments, that number is meaningfully lower than it is for subordinated credit or equity.
What Happens When a Borrower Misses a Payment
When a borrower trips a covenant, the process that follows is less dramatic than the term implies. Typically, the PE sponsor, the private equity firm that owns the company and put up equity to finance the original acquisition, steps in. Sponsors have strong incentives to protect their investment by injecting additional capital, negotiating covenant amendments, or restructuring the arrangement to give the business time to recover. As Katie describes it, the scenario where a sponsor walks away and hands the keys to the lender is exceedingly rare, and it is rare in part because this is a relationship business. A sponsor that abandons a portfolio company in distress will find the next conversation with that lender considerably more difficult.
The covenant structure itself provides early warning. Private credit loans typically include maintenance covenants that require the borrower to stay within agreed financial ratios: interest coverage, leverage, or both. A breach triggers renegotiation before the situation becomes a default. That early warning mechanism does not exist in the same way in broadly syndicated loan markets or high yield bonds.
For a more detailed walkthrough of loan structure across direct lending, mezzanine, and specialty finance, the Private Credit Investment Guide 2026 covers the full capital stack in depth.
Why Falling Returns Are Not a Credit Quality Signal
Falling absolute yields in private credit reflect Fed rate cuts and credit spread normalization; both are credit-positive conditions. This is the most important misread in the current conversation, and it is worth stating precisely.
Private credit loans are floating rate, structured as SOFR plus a spread. When the Federal Reserve cuts rates, SOFR declines, and absolute yields decline with it regardless of what is happening to credit quality. When credit spreads tighten, because banks are more active lenders today and because corporate fundamentals have improved, yields compress further. A portfolio that yielded 13-14% in 2022 now yields 8-9%. That compression is almost entirely explained by two-plus points of rate cuts and spread normalization, not by deteriorating underwriting.
The irony Katie names explicitly: investors worried about a wave of defaults when rates were high and debt service burdens were elevated. Now that rate cuts have reduced borrowing costs and interest coverage ratios have improved, with borrower cash flows covering interest expense by two times, the concern is still a wave of defaults. The directional shift is credit-positive, but the narrative has not updated to match.
Private credit is not an absolute return asset class. It is a relative return asset class, benchmarked against high yield bonds and broadly syndicated loans. The correct question is not "what am I earning?" but "what premium am I earning over the liquid alternative?" That premium has compressed somewhat as competition has increased. It has not disappeared.
Are you evaluating a private credit allocation alongside peers who have invested with the same managers?
Long Angle members compare notes on private market decisions in a solicitation-free environment. No advisors in the room with a commission motive, just investors who have reviewed the same diligence materials and made their own decisions. Members have invested across every offering the platform has brought, and the forum threads are part of the permanent diligence record.
What the 2025 Redemption Cycle Signals
Elevated redemption requests at private credit funds signal investor sentiment and a mismatch in liquidity expectations. They do not, on their own, signal credit deterioration in the underlying loan books. That distinction is not a defensive talking point from an asset manager. It is a structural fact about how these vehicles work.
The 5% quarterly redemption cap that most non-traded BDCs operate under is not a gate that managers invented in response to the current crisis. It has been part of the fund structure since inception. Its purpose is to prevent the scenario where a rush of exits forces managers to sell good assets at distressed prices, impairing the returns of investors who remain. As CAIA's April 2026 analysis noted, a spike in redemption requests is a sentiment signal; treating it as evidence of credit deterioration conflates two different problems.
How Redemption Gates Work and Why They Exist
The mechanics are worth understanding precisely. When redemption requests exceed the quarterly 5% cap, managers fulfill the permitted amount and carry the remainder forward to the next quarter. No investor loses their money; they wait for their position in the queue. The fund does not sell assets at fire-sale prices to meet excess requests. The structure absorbs the pressure and distributes the liquidity in an orderly way over time.
iCapital's research from March 2026 noted that the average debt-to-equity ratio for non-traded BDCs stood at 0.71x, well below the regulatory limit of 2.0x, with asset coverage cushions averaging 38.6%. The portfolio math supports orderly processing. The headline does not reflect that math.
There is also a useful historical precedent. Blackstone's BREIT, its non-traded real estate fund, underwent a comparable cycle in 2022-2023. Redemption requests exceeded caps, media coverage was intense, and the narrative looked similar to what private credit is experiencing now. BREIT continued to perform through the redemption period and emerged with net inflows from the same investor base. Katie's expectation is that credit is now undergoing its version of the same cycle; the investor base that remains on the other side will be one that understands what it owns.
The natural liquidity embedded in the direct lending portfolio helps. Loans repay at roughly 6-8% per quarter through normal course refinancings and maturities. A fund offering 5% quarterly liquidity can, in many environments, fund that tender entirely from repayments without selling a single asset.
The Software Exposure Question
Software represents approximately 20% of the direct lending market, and that concentration has become a focal point of the current narrative. The concern is legitimate in premise but frequently overstated in application.
Software's prominence in direct lending tracks private equity activity. Where PE sponsors have invested heavily, and software has been a primary target for institutional PE over the past two decades, direct lenders follow as the debt capital provider. The relationship is structural: the sponsor provides equity, the lender provides the senior debt, and the combined capital finances the acquisition.
The BIS Quarterly Review published in March 2026 confirmed that SaaS loans reached 19% of total direct loans by end-2025, with a third of private credit funds holding some exposure to the sector. That is a meaningful concentration. It is not a uniform risk. The relevant question is which software, and Katie is specific about what she means.
Large, vertically integrated enterprise software businesses with deep domain expertise in their particular niche, owned by institutional PE sponsors with long track records in the space, are not the same risk as early-stage SaaS companies dependent on a single product. For the former category, AI is more likely to be an additional tool in an already complex product stack than an existential threat to the business model. Blue Owl has been underwriting AI-specific risk in its software portfolio for years. ChatGPT is four years old. The variable that markets treated as new in early 2025 was not new to lenders who had been thinking about it at the loan level.
What to Evaluate Before Investing in Private Credit
The most important evaluation dimensions for a private credit allocation are manager scale, borrower quality and sponsor relationships, loan-level structure, vehicle liquidity mechanics, and fee transparency. None of those dimensions are headline default rates or absolute yield.
Manager scale matters because larger platforms compete for the same borrowers as major banks, which enables tighter loan terms, better covenant packages, and more granular diversification across names and sectors. A platform managing $150 billion in credit assets is negotiating from a different position than one managing $2 billion.
Loan-level structure starts with the lien position. First-lien, senior secured is a materially different risk profile than mezzanine or subordinated debt. Most of what gets described as "private credit" in the institutional direct lending market is first-lien. That matters enormously for recovery in a default scenario.
Vehicle liquidity mechanics determine how your exit works, and this is where the current cycle is exposing a real education gap. An evergreen non-traded BDC with a 5% quarterly cap is not the same product as a publicly traded BDC with daily liquidity; and neither is the same as a closed-end drawdown fund with a defined life. Reading the fund documents before making a redemption decision is not optional.
Fee transparency covers the full economics: management fee, carried interest, any placement fees paid to intermediaries. The Long Angle investments platform structures offerings with no placement fees to GPs and negotiated fee reductions passed directly to members, a meaningful alignment difference from how many alternative investment platforms operate.
The Two Questions That Separate Signal from Noise
When evaluating any private credit headline, two questions do most of the work.
First, are current default rates elevated relative to historical norms for this asset class, or just above zero? Third-party data consistently shows defaults running at 2-3% across the market, average by historical standards. Any individual default that generates media coverage is not evidence of a systemic pattern unless the data shows a pattern.
Second, is the yield decline you are observing explained by rate and spread mechanics, or by credit deterioration? If base rates have fallen two points and spreads have tightened modestly in a more competitive environment, the math explains the yield move entirely. If yields are falling for reasons that do not track those inputs, that is a different conversation.
The Long Angle community includes members who have invested across multiple private credit offerings and are actively tracking portfolio performance, capital call schedules, and GP communication in real time. That peer layer, investors comparing notes on the same managers they have actually committed capital to, is a different kind of due diligence than any white paper or media narrative provides. For members thinking through a private credit position, that conversation is already happening. The Private Credit Perspectives Q1 2026 piece covers the broader market context in depth.
Frequently Asked Questions
What is private credit investing?
Private credit investing is direct lending by non-bank institutions to companies outside public markets, typically through floating-rate, senior-secured loans that offer yield premiums over public equivalents in exchange for lower liquidity. It includes direct lending, mezzanine debt, and specialty finance, with direct lending to PE-sponsored companies being the largest segment of the institutional market today.
Why are private credit funds blocking redemptions in 2025?
Redemption requests have exceeded quarterly caps at several large BDCs, triggering gates that were always part of the fund structure and designed to prevent forced asset sales in periods of elevated investor outflows. The gates are functioning as intended. As Wealth Management's reporting on the cycle noted, the fundamental question is whether the issue reflects underlying loan quality or the limitations of semi-liquid vehicle structures being tested for the first time at scale.
Does falling yield mean private credit is deteriorating?
No. Yield has declined primarily because the Fed cut rates by roughly two percentage points and credit spreads normalized; both are credit-positive conditions, not signs of underwriting problems. Private credit is a relative return asset class; the relevant benchmark is the premium over high yield bonds and broadly syndicated loans, not the absolute yield against a prior period when rates were higher.
How much of private credit is exposed to software and AI disruption?
Software represents approximately 20% of the direct lending market, but most of that exposure is to large, vertically integrated enterprise software companies owned by institutional PE sponsors, not early-stage SaaS. The BIS Quarterly Review confirmed SaaS loans reached 19% of total direct loans by end-2025. The risk is real but not uniform; the relevant variable is which software companies, owned by whom, at what leverage, with what covenant structure.
How do I evaluate a private credit fund before investing?
The most important dimensions are manager scale and borrower quality, loan-level structure (first-lien vs. subordinated), vehicle liquidity mechanics (evergreen BDC vs. interval fund vs. closed-end drawdown), and fee transparency including any placement fees paid to intermediaries. Default rate headlines and absolute yield levels are less informative than those structural dimensions.
What is the difference between a BDC and a private credit fund?
A business development company is a regulated structure that can be publicly traded or non-traded, providing HNW and institutional investors access to private credit portfolios with defined liquidity terms and regular reporting requirements. Private credit funds are typically closed-end institutional vehicles with different access thresholds, liquidity profiles, and reporting cadences. Both invest in similar underlying loans; the wrapper determines how you get in and out.
How do private credit returns compare to high yield bonds?
Private credit historically delivers yield premiums of 200-600 basis points over comparable public credit markets, per Cambridge Associates, as compensation for illiquidity and the additional structural protections lenders negotiate directly with borrowers. That spread has compressed modestly as the asset class has grown and competition has increased. It has not disappeared.
Final Thoughts
The loans and the sentiment have been running in opposite directions since late 2024. That divergence is uncomfortable to sit with, and it is the reason this conversation is worth having carefully rather than quickly. Katie's framework is not a defense of private credit as an asset class. It is a set of tools for distinguishing a credit problem from a liquidity structure problem being read as a credit problem. Those are different decisions with different implications for whether you hold, exit, or add to a position.
The asset class will come through the current cycle with a smaller investor base; as Katie describes it, one that understands what it owns. For allocators evaluating where they want to be in that cohort, the vocabulary in this conversation is the right place to start.
The decisions that matter most in private markets are rarely made alone. They are made better when you can compare notes with investors who have evaluated the same managers, committed to the same offerings, and are watching the same quarterly updates you are.
Long Angle is a vetted community of high-net-worth founders, executives, and investors who do exactly that in a solicitation-free environment. Members access institutional-grade private market opportunities across private equity, private credit, real estate, and venture, with full diligence materials, recorded GP webinars, and a peer forum thread on every offering that becomes part of the permanent diligence record. There is no membership fee to join.
The current private credit moment is active in the Long Angle community right now. Members are comparing notes on specific managers, specific fund structures, and what the redemption cycle means for their existing allocations.
Resources Mentioned
Private Credit Investment Guide 2026 - Long Angle's guide to direct lending, mezzanine, and specialty finance structures
Private Credit Perspectives Q1 2026 - Long Angle's quarterly view on whether recent signals reflect stress or sound plumbing
2026 High-Net-Worth Asset Allocation Study - Long Angle's annual benchmark; private and alternative assets average 28% of member portfolios
Alternative Universe: Building Wealth through Alternative Investments with Matt Shechtman - Companion Navigating Wealth episode on private markets allocation
BIS Quarterly Review, March 2026 - Private credit's software lending meets AI disruption
CAIA, April 2026 - Private credit redemptions, defaults, and wrappers
iCapital, March 2026 - BDC redemptions: looking beyond the gates
Cambridge Associates - Private credit strategies: an introduction
Wealth Management - Private credit funds face redemption crisis
