For the past two years, we have maintained a cautious stance on private credit. This caution has not been rooted in a macro prediction or an imminent recession forecast. It has been more structural. Simply put, too much capital has been chasing a finite opportunity set.
Too much capital, too few deals
Large and persistent inflows into private credit have pushed lenders into the same deals, which has in turn compressed spreads and gradually weakened underwriting standards. As competition intensified, documentation standards loosened, covenant terms were softened, EBITDA adjustments grew more generous, and return per unit of risk declined. None of this looked alarming in isolation, but collectively it created a market that functioned best in an environment of steady inflows, benign credit conditions, and limited price discovery.
Marketed as low-volatility
Private credit has consistently been marketed as "low volatility." Technically, that is true. Reported marks tend to move gradually and drawdowns appear modest compared to public-market alternatives. But that stability is often a function of appraisal frequency rather than economic reality. If home prices in your neighborhood are falling but you never check the value of your house, the asset does not become less volatile — you simply defer the moment of price discovery. Private credit works similarly. Valuations are stable until credit events occur or transactions test them.
“If you never check the value of your house, the asset does not become less volatile — you simply defer price discovery.”
The tests arrive
Recent developments have begun to provide those tests. Consider Blue Owl's retail-focused private credit vehicle, which was marketed as "semi-liquid" with quarterly redemption features. While the fund documents disclosed a quarterly redemption gate of up to 5% of NAV, many investors understandably focused on the headline promise of periodic liquidity rather than the mechanics of fund gating. Structures like this function smoothly when redemption requests are modest and portfolio assets can be sold near par. The model becomes more fragile when redemptions rise or portfolio asset valuations decline.
Blue Owl recently disclosed selling several assets "essentially at par" in order to meet redemption requests. On its face, this disclosure was meant to reassure investors that the underlying portfolio remains sound and that loans can be monetized without meaningful losses. That may well be true, but it is also worth remembering how liquidity events typically unfold. In periods of stress, managers generally sell their strongest and most liquid positions first. Those loans become the currency used to meet withdrawals. Over time, that dynamic can leave behind a portfolio that is less liquid and potentially higher-risk.
A second data point comes from New Mountain's BDC, which recently sold approximately $477 million of loans at roughly 94 cents on the dollar. Management framed the transaction as portfolio optimization — an opportunity to improve diversification, reduce PIK exposure, and enhance financial flexibility. Yet the clearing price is notable. A 6% discount on a sizable, diversified pool of loans suggests that private credit marks are not immune to discounting when tested in actual transactions. As more volume trades in secondary markets, there is room for further convergence between reported NAVs and executable prices.
What BDCs reveal
This is why the information investors gather from BDCs is particularly useful in the current environment. Unlike much of the broader private credit universe, BDCs provide a relative measure of transparency: company-level holdings, periodic fair-value marks, and disclosure around capital activity. Across BDCs and non-traded private credit vehicles, we are observing several consistent themes. Valuations are drifting lower at the margin. NAVs are edging down rather than collapsing, but the direction has been steadily negative. Sector exposure remains heavily tilted toward sponsor-backed software and technology businesses, areas where public-market investors are increasingly debating growth durability and AI-driven disruption risks. At the same time, redemption requests in non-traded vehicles have risen.
None of these developments suggest a systemic crisis. Banks remain well capitalized, default rates are not spiking dramatically, and the broader economy continues to grow. However, the mechanics of the private credit ecosystem are beginning to change. If inflows slow while redemptions remain elevated, private credit's capacity to fund new loans will naturally contract. Should the syndicated loan market also soften simultaneously, the overall credit market contracts and the "credit wheel" turns more slowly. In that scenario, spreads likely need to reset to more conservative levels to attract fresh capital.
The air, not the bubble
In our opinion, what is unfolding is not the bursting of a bubble; rather, it is like the air gradually escaping from a car's tire. The past decade offered unusually supportive conditions of low interest rates, abundant capital, limited defaults, and strong sponsor activity. The next phase of credit investing may be characterized by more dispersion, more selectivity, and genuine fundamental credit work. For investors, in a world where price discovery is returning and liquidity is no longer taken for granted, underwriting discipline and structural protections matter more than ever. ■