With Private Credit We See The Credit Cycle Hasn’t Been Repealed

Authored by Jay Rogers via RealClearMarkets.com,

Something cracked in private credit this month, and the men who manage systemic risk for a living are saying so.

Goldman Sachs CEO David Solomon’s just-released 2025 annual shareholder letter warns that concerns about private credit – including “underwriting quality or exposure to software companies that may be negatively affected by AI” – are “a reminder that the credit cycle has not been repealed.” His predecessor Lloyd Blankfein went further on Bloomberg’s Big Take podcast: “I don’t feel the storm, but the horses are starting to whinny in the corral.” JPMorgan has already voted with its balance sheet, marking down software company loans held as collateral by private credit funds and reducing borrowing capacity for those funds, before any actual defaults. “I’m shocked that people are shocked,” said JPMorgan’s Troy Rohrbaugh.

The backdrop is three major liquidity failures in the space of six weeks. Blackstone’s $82 billion BCRED faced record redemption requests of $3.7 billion (7.9% of assets) and had to inject $400 million of its own capital to honor them. BlackRock gated its $26 billion HLEND after receiving withdrawal requests of 9.3% of NAV. Blue Owl permanently halted redemptions in OBDC II and sold $1.4 billion in loans to fund an orderly exit. Blue Owl shares have since fallen roughly 40% year-to-date.

These are not random liquidity events. They are the structural consequence of a capital concentration problem I have been watching build for a decade. In 2025 alone, the ten largest private credit funds captured nearly 46% of all capital raised, the highest concentration in over a decade. That tidal wave of capital forces mega-platforms into ever-larger deals, typically companies with $200 million or more in EBITDA, where they compete head-to-head with broadly syndicated loan syndicates and public high-yield. The result is spread compression, yield erosion, and the complete elimination of the pricing advantages that private credit was supposed to offer.

The AI disruption angle makes the mega-fund problem worse. Software represents roughly 25% of all private credit loans. The sector’s underwriting assumptions – stable recurring revenue, high switching costs, durable cash flows – are precisely what AI tooling is actively challenging. Fitch’s privately monitored ratings portfolio posted a record 9.2% default rate in 2025, up from 8.1% in 2024, with companies below $25 million EBITDA posting a 15.8% default rate. When software loan valuations get marked to reflect AI disruption reality, the leverage stack that amplified returns on the way up will amplify losses on the way down.

Contrast this with the lower middle market. Middle-market direct-lending spreads have stabilized in the 500–550 bps range over SOFR, carrying a 100–150 bps premium to syndicated markets. Q3 2025 BDC data showed all-in yields still at 9.76% after 150 bps of rate cuts, with trailing one-year realized losses of just 0.66%. These are smaller companies with less AI disruption exposure, stronger covenants, bilateral lender relationships, and managers who can still walk away from a bad deal. Preqin return dispersion data shows top-quartile North America direct-lending IRRs outpacing medians at an increasing rate, precisely because scale-driven managers are chasing volume over selectivity.

Blankfein’s warning about retail exposure to private credit is the right one to heed. The $1.8 trillion private credit market has now reached the approximate size of the subprime mortgage market at its 2007 peak. The push by both Wall Street and the Trump administration to route this exposure through 401(k) plans, at the precise moment the cycle is turning, is a risk worth naming clearly.

For allocators, the path forward is clear.

Avoid the liquidity mismatch of retail evergreen vehicles – the redemption crises of early 2026 were structural, not idiosyncratic. Avoid software-heavy direct lending portfolios until the AI disruption cycle is fully repriced. Favor closed-end, institutional-grade mid-market funds with experienced managers who still underwrite as if it is their own capital. The returns are still there in private credit, just are not where the most capital went.

Private credit is not broken. The credit cycle has not been repealed. It has merely been deferred – and Goldman’s Solomon, JPMorgan’s Rohrbaugh, and Blankfein’s corral metaphor are all pointing at the same door.