Is there a debt bubble in private equity and private credit, and how big is it?
Carson's view is that private equity and private credit form a roughly $9.4 trillion bubble spanning about 12,500 companies and 11 million workers, where managers both profit from and value the assets. The reported default rate of about 2.0% (KBRA, Q4 2025) compares with a 6.4% shadow default rate (Lincoln International, Q4 2025) once distressed exchanges, PIK conversions and amend-to-extend deals are counted.
Key takeaways
- Private credit deployed $593 billion in 2024, a 78% year-over-year increase, and its assets under management reached $3.5 trillion in 2025.
- S&P studies found 47% of LBO EBITDA was add-backs from 2020 to 2025, and real leverage ran about 3.3 turns higher than marketed by Year 2.
- First-lien recovery rates fell from 76% in 2022 to 39% in 2024, while covenant-lite deals rose from 4% to 21% in two years.
- About $718 billion of US pension money is in private equity; Oregon PERS allocates 26.9%, while Norway's roughly $2.1 trillion sovereign fund holds none.
- Re-marking the Cliffwater Corporate Lending Fund (CCLFX) suggests about 78 cents on the dollar versus 100 cents reported, framed as a mark-accuracy question, not a fraud allegation.
Investing · Deep dive
The Private Equity & Private Credit Debt Crisis: A Complete Data Guide
Private equity and private credit have quietly become a $9.4 trillion shadow financial system — one where the managers who profit from the assets are the same people who decide what they're worth. This is the complete, sourced walk-through of how the bubble was built, where the cracks are showing, and who ends up holding the loss.
- PE + private credit control ~$9.4T across ~12,500 companies and ~11M workers.
- The reported ~2.0% default rate hides a 6.4% shadow default rate (Lincoln International, Q4 2025).
- $718B of US pension money is in PE; Oregon PERS leads at 26.9%, Norway holds 0%.
- A $1.54T affiliated-reinsurance hole sits against just $657B of life-insurer surplus.
- Re-marking the largest interval fund (CCLFX) suggests ~78¢ on the dollar vs. the 100¢ reported.
How big is the private equity and private credit bubble?
Private equity and private credit together control roughly $9.4 trillion across about 12,500 companies employing around 11 million workers. Private credit alone deployed $593 billion in 2024, up 78% year over year, and its assets under management reached $3.5 trillion in 2025, with Morgan Stanley projecting $5 trillion by 2029.
Private equity and private credit together control roughly $9.4 trillion in assets, across about 12,500 companies employing around 11 million workers. What began as a niche asset class is now a parallel financial system larger than most people realize — there are more PE-backed companies in America than McDonald's locations.
Private credit alone deployed $593 billion in 2024, a 78% year-over-year increase. Its AUM hit $3.5 trillion in 2025 — nearly doubling from $2 trillion in two years — with Morgan Stanley projecting $5 trillion by 2029. The money machine has never been bigger. The open question is whether the assets behind it are real.
How do private equity fees reward deploying capital over returns?
PE firms collect a 2% management fee on committed capital regardless of performance, nearly $188 billion a year on $9.4 trillion, plus 20% carried interest on profits. Add-on deals, now 76% of PE-backed buyouts, buy small companies at 5–8x earnings and bolt them onto platforms valued at 12–15x, creating largely paper gains.
The PE business model rewards deployment, not performance. Firms collect a 2% management fee on committed capital regardless of returns — nearly $188 billion per year on $9.4 trillion, before a single dollar is returned to investors. Carried interest adds 20% of profits on top.
"These are not investors. They are dealmakers."— attributed in the source material
Add-on deals now represent 76% of all PE-backed buyouts: buying small companies at 5–8x earnings and bolting them onto platforms valued at 12–15x. The "value creation" is largely paper arbitrage. Build the model, get the deal done, book the fee.
What is the real private credit default rate, and how does the PIK death spiral work?
The reported default rate is about 2.0% (KBRA, Q4 2025), but Lincoln International's shadow default rate, which counts distressed exchanges, PIK conversions and amend-to-extend deals, was 6.4%. In a PIK spiral, unpaid interest is added to principal, booked as income, and paid out as cash dividends the borrower never actually paid.
The headline default rate of about 2.0% (KBRA, Q4 2025) is contested. Counting distressed exchanges, PIK conversions, and amend-to-extend deals that never appear in official numbers, Lincoln International put the shadow default rate at 6.4% in Q4 2025 — more than 3x the reported figure. In 2024, distressed exchanges ran 5x conventional defaults.
How the PIK death spiral works
- A borrower can't pay cash interest, so the lender agrees to PIK (Payment-In-Kind) — interest added to principal.
- The BDC reports the PIK as "income," even though no cash was received.
- The BDC pays cash dividends on that phantom income (it must distribute 90% of taxable income).
- If the borrower defaults, the income was never real — but the dividends were already paid out.
- The result is a slow bleed of capital disguised as income generation.
The EBITDA add-back scam
Sponsors inflate EBITDA to make leverage look manageable. S&P's studies of hundreds of deals found that 47% of LBO EBITDA is add-backs (2020–2025), 54% of deals miss projections by 25%+ (S&P, 2023), and real leverage runs about 3.3 turns higher than marketed by Year 2. Common tactics: phantom synergies, recurring "one-time" costs, the related-party REIT rent trick, and pro-forma adjustments for locations still under construction. Reported leverage of 6x is often 8–10x in reality.
Sources: S&P Global Ratings EBITDA Add-back Studies (2020–2025); Bloomberg (Feb 2025); PitchBook (2026); Moody's (2014).
How much do lenders recover when a PE-backed roll-up fails?
Often very little, because the collateral is leased property and bolted-in equipment. Enterprise-value recoveries for asset-light roll-ups run about 10–25 cents on the dollar for car washes, 15–35 cents for software and 20–40 cents for dental, and overall first-lien recovery rates fell from 76% in 2022 to 39% in 2024.
"What is the liquidation value of a car wash? Hoses and soap."
"Senior secured" means little when the collateral is leased property with bolted-in equipment. Recovery on enterprise value collapses for asset-light roll-ups: car wash 10–25¢, software 15–35¢, dental 20–40¢. First-lien recovery rates overall fell from 76% in 2022 to 39% in 2024. Covenant-lite deals jumped from 4% to 21% in two years, and 50% of mega-deals over $500M lack financial maintenance covenants entirely.
| Metric | Sponsor case | Stressed | Real distress |
|---|---|---|---|
| EBITDA | $50M | $35M | $25M |
| Multiple | 9.0x | 5.4x | 3.6x |
| Enterprise value | $450M | $189M | $90M |
| Equity value | $175M | $0 | $0 |
| Lender recovery | — | 68.7% | 32.7% |
Try the interactive stress-test calculator →
How do private equity owners pass companies along with more debt each time?
Companies change hands between PE owners, each adding debt, until one fails. Across 57 tracked companies the average was 2.8 ownership changes, with 21 ending in bankruptcy. GP-led continuation vehicles, where a manager sells a company from one of its funds to another it also runs, reached $115 billion in 2025, up from $75 billion.
Companies get passed from one PE owner to the next, each time with more debt, until the music stops. Across 57 tracked companies the average is 2.8 ownership changes, with 21 ending in bankruptcy. Mister Car Wash traced from Onex ($52M equity) → Leonard Green ($520M) → IPO at $15 → peak $23.53 → going private at $7 — a 53% drop from IPO, 70% from peak, with Leonard Green owning 67% throughout.
The newest twist: GP-led continuation vehicles hit $115 billion in 2025 (up from $75B in 2024) — a GP selling a company from one fund to another fund it also manages, generating new fees and carry on the same asset.
| Company | Owners | Outcome |
|---|---|---|
| Energy Future (TXU) | KKR + TPG + Goldman | Largest PE bankruptcy ever (~$45B) |
| Toys R Us | KKR + Bain + Vornado | Liquidated 2018 (~$5B) |
| Caesars (Harrah's) | Apollo + TPG | Bankruptcy 2015 (~$30.7B) |
| Red Lobster | Golden Gate → Thai Union | Bankrupt 2024 (sale-leaseback) |
| Steward Health Care | Cerberus | Bankrupt 2024 ($9B+) |
See all Live Grenade timelines →
How do PE-owned insurers move annuity assets into private credit?
They buy an insurer for permanent capital, shift its assets from bonds into PE-originated private credit, CLOs and ABS, report them at amortized cost, and cede liabilities to Bermuda affiliates. The profit is the spread between 3–5% annuity promises and 8–12% private credit yields; roughly $1.1 trillion now sits offshore without mark-to-market.
Roughly $1.1 trillion sits offshore with no mark-to-market. The play, step by step: acquire an insurer for permanent capital; redirect assets from bonds into PE-originated private credit, CLOs, and ABS; report at amortized cost under statutory accounting; cede liabilities to a Bermuda affiliate; secure favorable private letter ratings; and harvest the spread between the annuitant promise (3–5%) and PC yield (8–12%). Failure cases already include PHL Variable (Golden Gate, $2.2B deficit, pursuing liquidation) and 777 Partners / 777 Re ($500M fraud, three insurers insolvent, co-founder indicted).
How much pension money is exposed to private equity?
About $718 billion of retiree money is invested in private equity. Oregon PERS is the worst case at 26.9%, nearly twice the national average, and university endowments run higher still, with Yale at 50% and Harvard at 41%. Norway's roughly $2.1 trillion sovereign wealth fund, by contrast, holds no private equity at all.
$718 billion of retiree money is in private equity. Oregon PERS is the worst case at 26.9% — nearly 2x the national average — with $3.7B lost to overallocation and PE returning 4.1% vs the Russell 3000's 38.4% over a comparison period. University endowments run higher still. Norway's ~$2.1T sovereign fund, by contrast, holds zero PE.
| Allocator | PE % | AUM |
|---|---|---|
| Yale Endowment | 50% | $20.7B |
| Harvard (HMC) | 41% | $21.3B |
| Oregon PERS | 26.9% | $26B |
| CalPERS | 17.7% | $98B |
| CalSTRS | 15.7% | $55B |
| Norway sovereign fund | 0% | ~$2.1T |
Explore the full pension map →
What are the signs of stress in private credit in 2025–2026?
Blue Owl fell 65% from its high and halted OBDC II redemptions, Morgan Stanley's North Haven capped withdrawals at 5%, and BCRED saw $3.7 billion redeemed in early 2026. A record $25 billion of software loans trade below 80 cents, Fitch put BDC defaults at 5.8%, and Moody's cited 7.5%.
"We are in the super-early innings of the wheels coming off the car."— Boaz Weinstein, Saba Capital, February 2026
Blue Owl fell 65% from its high and permanently halted OBDC II redemptions ($1.6B in liquidation). Morgan Stanley's North Haven was hit with 10.9% redemption requests and enforced a 5% cap. A record $25B of software loans trade below 80 cents. PE was behind 54% of the 35 largest US bankruptcies in 2025. BCRED saw $3.7B redeemed in Jan–Feb 2026. Meanwhile Fitch put the BDC default rate at 5.8% (Feb 2026), Moody's cited 7.5%, and Marathon warned software defaults could hit 15%.
How do banks profit from lending to private credit funds?
Banks earn about a 29.2% return on equity lending to private credit funds versus 7.9% on traditional commercial loans. They collect $3.5–8 million per $100 million arranging LBO debt, then warehouse and package the loans into CLOs for another 1–2% fee, while insurers, pensioners and retail investors end up holding the risk.
Banks earn nearly 4x the return lending to private credit funds: a 29.2% return on equity versus 7.9% for traditional commercial lending. The fee chain: a PE firm does the LBO → the bank earns $3.5–8M per $100M arranging debt → the bank warehouses the loans → packages them into a CLO (1–2% structuring fee) → a PE-owned insurer buys the "AAA" tranche at amortized cost → and annuity holders, pension beneficiaries, and retail investors bear the risk. NDFI lending has passed $1.32 trillion, quadrupling since 2016. Norinchukin — the world's largest single CLO investor at $54B — lost $9.3B in FY2024 on CLO markdowns.
How is private credit being sold to retail investors through RIAs?
Private equity has acquired roughly 42% of all RIA assets, so it can manufacture funds, wrap them through gatekeepers like iCapital and CAIS, and place them in client portfolios behind quarterly redemption gates. A $1 million portfolio with 20% alternatives can carry five fee layers totaling about 1.69%, roughly $169,000 over ten years.
Private equity has acquired roughly 42% of all RIA assets — owning the advisors, manufacturing the products, controlling the platforms, and now moving toward 401(k)s. The pipeline: a PE firm manufactures the fund, a gatekeeper (iCapital, CAIS) wraps it, a PE-backed RIA places it in client portfolios, and quarterly redemption gates lock the money in. A $1M portfolio with 20% alternatives can carry five fee layers totaling ~1.69% of the whole portfolio — roughly $169,000 over ten years — while the client sees "1%" on the statement.
How big is the affiliated reinsurance hole in the life insurance industry?
Forensic accountant Thomas Gober calculated $1.54 trillion of affiliated reinsurance across 714 US life and annuity carriers at year-end 2025, or 235% of the industry's $657 billion in surplus. Strip out that reinsurance credit and 29 of the top 30 insurers would be insolvent; only MassMutual, a mutual with no PE overlay, survives.
"$1.54 trillion against 650 billion in total surplus. If even half of this is not good, it breaks everybody. And this is just the affiliated."— Tom Gober, forensic accountant
Using NAIC/SNL data for year-end 2025, forensic accountant Thomas Gober calculated total affiliated reinsurance across all 714 licensed US life & annuity carriers at $1.54 trillion — 235% of the industry's $657 billion in surplus. Strip the affiliated-reinsurance credit from each balance sheet and 29 of the top 30 insurers are insolvent without it; the only survivor is MassMutual, a mutual with no PE overlay.
| Entity | Affil. reins. | Surplus | Ratio |
|---|---|---|---|
| Athene (Apollo) | $235.7B | $4.1B | 5,719% |
| RGA Reinsurance | $72.7B | $3.0B | 2,432% |
| Hannover Life Re | $56.9B | $0.6B | 9,857% |
| Commonwealth Annuity (KKR) | $47.2B | $6.9B | 687% |
| Amer. Equity Life (Brookfield) | $35.6B | $2.8B | 1,288% |
Read the full insurance investigation →
Is the Cliffwater Corporate Lending Fund (CCLFX) overvalued?
Carson re-marked all 2,330 positions in CCLFX, the largest private credit interval fund at about $49.8 billion of gross assets, against secondary-market rates and free cash flow. His estimate is a roughly $7.1 billion overstatement, about 14% of assets and 22% of NAV, with PIK entries rising from zero in 2021 to 189 by late 2025.
Everything above is macro. So I opened the hood on one fund: CCLFX, the Cliffwater Corporate Lending Fund — the largest interval fund in private credit at ~$49.8B gross assets, marketed to retail as "senior secured lending," with 97% Level 3 assets. Parsing 2,330 positions from its SEC N-PORT filing and re-marking each against secondary-market rates and free-cash-flow analysis produces a three-way gap:
| Measure | Cliffwater | Market | FCF mark |
|---|---|---|---|
| Per dollar | 100¢ | 89¢ | 78¢ |
| Gross assets | $49.8B | $46.2B | $42.8B |
| Implied NAV | $31.5B | $27.9B | $24.5B |
The estimate is a ~$7.1B overstatement (14% of assets, 22% of NAV). Red flags include 189 PIK entries by late 2025 (from zero in 2021), 473 maturity extensions, $5B+ of first-loss CLO equity marked at par despite no secondary market, and self-dealing into captive vehicles. This is a question about mark accuracy given 97% Level 3 assets and no independent pricing — not an allegation of fraud.
Read the full CCLFX forensics →
Where are we in the private credit bubble cycle?
Mapped to classic bubble stages, the market moved from innovation (2009–2015) through boom, euphoria and denial to the start of panic in 2025–2026. The markers are Blue Owl's 65% drop, redemption gates, $3.7 billion of BCRED outflows in eight weeks, a 7.5% Moody's default rate, and Marathon's warning that software defaults could reach 15%.
Mapped to classic bubble mechanics: Innovation (2009–2015, genuine value) → Boom (2016–2019, fundraising surges) → Euphoria (2020–2022, "safer than IG bonds") → Denial (2023–2025, exits collapse, PIK surges) → Panic Begins (2025–2026) — you are here: Blue Owl −65%, redemption gates, BCRED outflows of $3.7B in eight weeks, Moody's default rate 7.5%, Marathon warning 15%. The music is stopping.
Frequently Asked Questions about the Private Credit Debt Crisis
How big is the private equity and private credit bubble?
PE and PC together control roughly $9.4 trillion across about 12,500 companies and 11 million workers. Private credit AUM alone reached $3.5 trillion in 2025, projected to $5 trillion by 2029.
What is the shadow default rate?
Reported ~2.0% (KBRA, Q4 2025); the real rate including distressed exchanges, PIK conversions, and amend-to-extend deals is 6.4% (Lincoln International, Q4 2025) — more than 3x higher.
How much pension money is exposed to PE?
About $718 billion. Oregon PERS leads at 26.9%; Yale's endowment is 50%. Norway's sovereign fund holds zero.
What is a PIK death spiral?
A borrower that can't pay cash interest adds it to principal (PIK). A BDC books that as "income" and pays cash dividends on it; if the borrower defaults, the income was never real but the dividends were already paid.
What is the $1.54 trillion insurance hole?
Total affiliated reinsurance across 714 US life and annuity carriers is $1.54 trillion (Gober/NAIC, YE 2025) — 235% of the industry's $657 billion surplus. Strip the credit and 29 of the top 30 insurers are insolvent.
Is this investment advice?
No. This is an investigative data guide compiled from SEC filings, pension fund reports, NAIC statements, and public records.
Explore the full interactive project — maps, calculators, and sortable databases — at carsonscorner.media/debtcrisis. Questions, corrections, or data tips: carson@passive.investments.
Private Credit and Debt Crisis Questions Investors Ask
These are the questions investors most often ask about private credit, BDCs, PIK debt, and where the stress is showing. Answers explain the mechanics; they are not recommendations on any fund or manager.
Private credit basics
What is private credit, and why has it grown so much?
Private credit is lending by non-bank funds directly to companies or real estate, outside public bond and syndicated loan markets. It grew rapidly after 2008 as bank regulation pushed lenders away from riskier middle-market and leveraged loans, and as pensions, insurers, and wealthy investors sought higher floating-rate yields. Private equity buyouts became its biggest customer. Loans are held to maturity, valued by the manager rather than daily markets, and are generally illiquid.
Why would a company take on private debt instead of a bank loan or bonds?
Speed, certainty, and flexibility. A private lender can close faster, hold the whole loan, keep terms confidential, and accept leverage or structures a bank would decline, including PIK interest or delayed-draw facilities. Private equity sponsors also value having one lender to negotiate with if the company struggles. The trade-off is cost: private loans usually carry higher spreads and fees than comparable bank or syndicated debt.
How does a bank and private credit partnership work?
The bank sources and often services the loans, while the private credit manager and its investors provide most of the capital. The bank keeps its client relationships and earns fees without holding the full loan on its balance sheet; the fund gets access to deal flow it couldn't originate alone. Banks also lend to the private credit funds themselves through leverage facilities, so the two are partners and competitors at the same time.
Is private credit deal execution as good as the banks', and are borrowers benefiting from the shift?
For many middle-market borrowers, yes. Private lenders offer faster closings, certainty of funding without syndication risk, and a single counterparty for amendments. Borrowers pay for that convenience through higher spreads and fees. For the largest deals, banks and the broadly syndicated market can still be cheaper, and borrowers increasingly shop both markets and refinance back to banks when spreads tighten.
How meaningful is the difference between drawdown and evergreen private credit funds?
Very meaningful, mainly for liquidity. Drawdown funds call capital over time, have a fixed life, and return money as loans repay, so investors cannot leave early but the fund is never forced to sell. Evergreen funds take money continuously and offer periodic redemptions, usually capped around 5% of assets per quarter. When many investors want out at once, evergreen funds hit those caps and redemptions are prorated or delayed.
Why investors are worried
Why is everyone so worried about private credit right now?
Because rapid growth, rising PIK usage, and opaque valuations make problems hard to see until they surface. Many borrowers took on floating-rate debt when rates were near zero, and higher rates strained their cash flow. Some lenders are allowing interest to be paid in kind instead of cash, which can hide stress. Retail and insurance money has flowed in through vehicles that promise liquidity on illiquid loans, raising the risk of a run if confidence breaks.
If private credit is struggling, why wouldn't private equity, which relies on the same companies, be in worse shape?
It often is, because equity absorbs losses before debt. When a portfolio company weakens, the private equity owner's stake falls in value first; the lender only loses once the equity is effectively gone. Private equity stress shows up as delayed exits, low distributions, continuation funds, and marks that lag reality rather than defaults. Private credit stress shows up later, through amendments, PIK toggles, and eventually restructurings.
Is direct lending actually under real stress, given redemption caps and falling BDC stock prices?
There is real but uneven stress. Most direct lending portfolios still report low headline defaults, but non-accruals, PIK income, and loan amendments have risen, and public BDC stock prices signal that the market doubts some reported values. Redemption caps being hit at large evergreen vehicles show investor nerves more than confirmed losses. The pressure is concentrated in highly leveraged borrowers and certain sectors rather than across the whole asset class.
Where is credit heading over the next five years?
Toward higher defaults and lower recoveries than the 2010s, with wide dispersion between managers. A large wave of leveraged loans made at peak valuations must be refinanced, and companies that can't cover interest at current rates will restructure. Spreads on new loans may stay tight because of heavy fundraising, which squeezes returns for lenders. Expect the gap between disciplined and aggressive managers to widen sharply.
Is a correction likely in private credit given crowded deals and loose documentation, and which strategies are best positioned?
A credit correction is a real risk, though it is more likely to be a slow grind than a crash. Crowded deals and weak covenants mean losses could be larger when defaults come. Strategies generally better positioned include senior secured lending with real covenants and lower leverage, asset-based lending backed by hard collateral, and distressed or special situations funds with dry powder to buy loans and companies at discounts once stress forces sales.
BDCs, redemptions, and market signals
What does it mean when withdrawal requests at a private credit fund exceed its 5% quarterly limit?
It means the fund will pay out only part of each request, and investors wait in line. Evergreen funds and non-traded BDCs typically cap redemptions around 5% of shares per quarter to avoid selling loans at a discount. When requests exceed that cap, payouts are prorated and the rest must be resubmitted. It signals heavy investor demand for liquidity, not by itself that the loans are bad, but it can pressure the manager to sell assets or merge vehicles.
Why have large BDC stock prices fallen?
Mostly because investors expect lower earnings and more credit losses. Falling short-term rates reduce income on floating-rate loans, which pressures dividends. At the same time, rising non-accruals and PIK income raise doubts about loan values, and heavy redemptions at private vehicles add to negative sentiment. When a BDC trades below its reported net asset value, the market is saying it doesn't fully trust those marks.
Why haven't BDC debt spreads moved much while BDC stocks have fallen?
Because bondholders sit ahead of shareholders and are well protected. Most BDCs have elected the minimum 150% asset coverage allowed since 2018, roughly a 2-to-1 debt-to-equity limit (200%, or 1-to-1, for those that haven't), so there is a large equity cushion beneath the unsecured notes. Shareholders take the first hit from lower income and credit losses; bondholders only worry if losses threaten that cushion. Stable debt spreads with falling stock prices point to earnings pressure, not imminent insolvency.
What should investors check before buying a high-yield BDC?
Check whether the dividend is earned, not just paid. Compare net investment income to the dividend, and look at how much income is PIK rather than cash. Review non-accruals, the trend in net asset value per share, leverage, fee structure, and how often the manager has issued shares below NAV. A long history of declining NAV with a high yield usually means investors are getting their own capital back, not a sustainable return.
PIK debt and the capital structure
How does PIK debt rank in the capital structure?
PIK describes how interest is paid, not where the debt ranks. Payment-in-kind interest is added to the loan balance instead of paid in cash, and that feature can appear on senior, second-lien, mezzanine, or holding company debt. In practice, PIK is most common in subordinated and holdco debt, which ranks behind operating-company senior loans. A PIK toggle on a senior loan often signals that the borrower can't afford cash interest.
Why is PIK debt typically issued at the holding company rather than the operating company?
To keep it out of the operating company's covenants and cash flow. Senior lenders at the operating company usually restrict additional debt and cash payments upstream, so a holdco PIK note adds leverage without breaching those terms. Because the holdco's only asset is its equity in the opco, holdco lenders are structurally subordinated and are repaid only after every opco creditor, which is why they demand higher rates.
How does a PIK real estate loan work?
The borrower pays some or all interest by adding it to the loan balance instead of paying cash. PIK structures are common in mezzanine debt, preferred equity, and construction or lease-up deals where the property doesn't yet produce enough income. The balance grows every month, so the loan must be repaid from a sale or refinance at a higher amount. If the property's value doesn't rise faster than the accruing balance, the borrower's equity shrinks.
How can lenders consider LBO debt safe when borrowers can move collateral to unrestricted subsidiaries?
They can't, unless the loan documents block it. Loose credit agreements have let private equity owners transfer valuable assets to unrestricted subsidiaries outside lenders' collateral and use them to raise new debt, a tactic often called a drop-down. Lenders now push for blockers that bar transfers of material assets and cap investments in unrestricted subsidiaries. How much protection exists depends entirely on the specific documents.
Underwriting, covenants, and regulation
Won't lower yields and more competition weaken how private credit lenders underwrite deals?
Yes, that is the usual pattern late in a credit cycle. When too much capital chases too few deals, lenders compete by cutting spreads, accepting higher leverage, loosening covenants, and allowing more add-backs to EBITDA. Each concession raises the loss when a borrower struggles. Investors should look at a manager's leverage levels, covenant terms, and documentation quality, not just the headline yield.
How are covenants managed in practice after a private credit loan closes?
Through regular financial reporting and negotiated amendments. Borrowers typically deliver monthly or quarterly financials and compliance certificates showing leverage and coverage ratios. When a covenant is about to be breached, the lender usually negotiates rather than accelerating: it may waive the breach in exchange for a fee, higher pricing, an equity injection from the sponsor, or tighter terms. Frequent amendments are an early sign of stress.
How will the OCC rescinding the leveraged lending guidance affect competition between banks and private credit?
It gives banks more room to compete for higher-leverage loans. In late 2025 the OCC and FDIC withdrew the 2013 interagency leveraged lending guidance, which had discouraged banks from making loans above roughly six times leverage. Banks can now apply their own risk standards, so they may reclaim some deals that went to private credit. The change affects nationally chartered banks and FDIC-supervised banks most directly.
Warning signs in funds and loan books
What are the signs a direct lending fund is in trouble?
Rising non-accruals and PIK income are the first signs. Watch for a growing share of interest paid in kind, frequent amendments and covenant waivers, loans marked at par despite weak borrower results, falling net asset value, dividend cuts, and redemption requests exceeding limits. Concentration in a few large borrowers or one sector magnifies the risk. A manager that stops raising new funds or merges vehicles may also be signaling trouble.
What are the signs a private equity firm looks successful but carries hidden risk?
Strong reported marks paired with weak cash distributions. Other warning signs include heavy use of continuation funds to sell assets to itself, portfolio companies relying on PIK debt or dividend recaps, net asset value lending against fund portfolios, and exits that keep getting delayed. Returns built on unrealized valuations rather than cash returned to investors are the clearest red flag.
How are software portfolio companies performing in private credit, and is there reason for concern?
Software is the largest sector exposure for many direct lenders, and there is reason to watch it closely. Many software loans were made at high leverage, some based on recurring revenue rather than profits. Higher rates strain those companies, and AI is raising questions about the durability of some software business models. If growth slows, refinancing gets harder and lenders may reduce software exposure over time.
What is a loan-to-own strategy in private credit?
It is lending, or buying debt, with the intent of ending up as the owner if the borrower fails. The lender acquires a senior position, often at a discount, and in a bankruptcy or restructuring converts that debt into control of the company through a credit bid or debt-for-equity swap. It can be a deliberate strategy for distressed funds, but it depends on strong collateral rights and court approval.
What happens when a private real estate lender has delinquent loans and its own maturities coming due?
It gets squeezed from both sides. Delinquent borrowers stop paying interest, while the lender still owes its own bank lines, notes, or investors. The lender may have to sell loans at a discount, foreclose to raise cash, extend its own obligations, or suspend investor distributions. Investors in that lender's notes or fund should watch for maturity extensions and payment deferrals, which often precede losses.
Positioning as an investor
Is direct lending still a good long-term investment given falling rates and heavy capital inflows?
It can be, but returns are likely to be lower and more dispersed. Falling base rates reduce income on floating-rate loans, and heavy inflows tighten spreads, while losses are rising from the low levels of the 2010s. Senior secured lending to sound businesses can still deliver steady income. The outcome depends heavily on the manager's underwriting discipline, fees, and use of leverage.
How are investors positioning portfolios for private credit risk?
Mostly by moving up in quality and down in leverage. Common moves include favoring senior secured loans over subordinated and PIK debt, reducing exposure to evergreen vehicles with liquidity mismatches, diversifying across managers and vintages, and keeping cash or dry powder for distressed opportunities. Some investors are shifting toward asset-backed and real estate credit with tangible collateral. None of this is personal advice; allocation depends on your goals and liquidity needs.
How does missing return targets on consecutive funds affect a credit manager's next fundraise?
It makes raising the next fund much harder. Institutional investors weigh track record heavily, and two disappointing funds in a row often lead them to pass, cut commitment size, or demand lower fees. Managers may respond with smaller funds, fee concessions, single-asset vehicles, or a merger with a larger platform. Managers who can't raise new capital eventually wind down, running off existing loans rather than making new ones.
Who is exposed and what to do now
Who is most exposed if private credit losses keep rising?
The people at the end of the chain, not the managers. Pension funds hold about $718 billion of retiree money in private equity, private equity–owned life insurers have moved annuity assets into private credit, and private equity owns roughly 42% of RIA assets that place evergreen funds in client portfolios. Banks earn fees arranging and lending to these funds, while insurers, pensioners and retail investors end up holding the risk.
What should investors who already own private credit funds or BDCs do now?
Check what you own before deciding anything. For a BDC, compare net investment income with the dividend, see how much income is PIK rather than cash, and review non-accruals, NAV per share and leverage. For an evergreen fund, read the redemption terms, since some cap withdrawals at 5% a quarter. Many investors are moving toward senior secured and asset-backed credit with lower leverage. This is general information, not personal advice; talk to your own advisor.
Sources
- KBRA — Private Credit: Q4 2025 Middle Market Borrower Surveillance Compendium (Feb 2026) — KBRA Middle Market Default Monitor, 2.0% by value in Q4 2025
- Lincoln International — Lincoln Private Market Index, Q4 2025 (Feb 2026) — "bad PIK" share of 6.4% used as a shadow default rate
- OCC — OCC and FDIC withdraw from the interagency leveraged lending guidance (Dec 5, 2025) — rescission of the 2013 guidance and 2014 FAQs
Primary sources for the page's material claims. Figures attributed to third parties are as reported by those sources on the dates shown; Carson's views are labeled as his opinion.
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Carson Jones
Carson Jones is the host of Carson's Corner: Commercial Real Estate, author of The Red Flag Playbook, a licensed commercial real estate advisor and business broker, and the founder of Passive Investments. With 18 years of experience as an entrepreneur and 12 years specializing in passive investing, Carson works with high-net-worth individuals, family offices, business owners, and sophisticated investors as a broker and principal.
Carson holds a BBA in Finance from Baylor University and his Tennessee commercial real estate license (#382989). He actively pursues acquisition and equity opportunities across the United States and abroad through a worldwide network of qualified buyers, family offices, institutional investors, and top-tier developers.