Private credit carries risks. Of course it does. Some borrowers will fail. Some managers will underwrite bad deals. Some products sold to retail investors will prove a poor fit. The question is whether retail investors are being warned about those risks with discipline and context or frightened into abandoning the managers best equipped to navigate them.
I spent more than 25 years in restructuring and distressed investing. That experience has made the recent retail flight from the asset class look less like a rational reassessment of private credit than a reaction to the story being told about it.
The divergence is stark. Large pension systems are not stampeding for the exits. Arizona’s Public Safety Personnel Retirement System has roughly 17% of its assets in private credit and is targeting 20%. The California State Teachers’ Retirement System (CalSTRS) says it remains committed to its long-term investment strategy, including private credit. Meanwhile, new retail money flowing into non-traded business development companies (BDCs) and related private-credit funds fell 45% in the first quarter from a year earlier. Institutions are picking winners while retail investors are running for the exits.
The narrative driving the retail exodus rests on three fears: rising defaults, redemption gates, and the prospect that artificial intelligence (AI) will decimate the software companies that form a large part of many portfolios. None of these concerns are imaginary. But much of the coverage has collapsed critical distinctions that anyone who has worked in this market knows matter enormously.
Fund liquidity events are being misread as credit events. Redemption requests have indeed jumped, but quarterly caps and gates in semi-liquid credit funds are not evidence of a broken structure. They are part of that structure. Funds that own illiquid loans are designed to limit redemptions so managers are not forced to dump assets into a weak market to satisfy panicked sellers. J.P. Morgan has made the same point, noting that gates and redemption queues are embedded in many vehicles by design and should not automatically be read as distress.
That does not mean every product was well designed or well sold. Illiquid strategies were pushed into semi-liquid formats for a broader investor base whose expectations for liquidity did not always match the underlying assets. Asset managers had every incentive to expand beyond institutional channels into wealth-management platforms, where demand for yield was strong and distribution was lucrative. When those expectations are tested, friction emerges. That is a product-design problem, not proof of broad credit deterioration.
The distinction matters because coverage that treats every gated fund as evidence of a collapsing asset class loses the ability to identify real distress when it appears. If every liquidity cap is a crisis, then no liquidity cap tells investors anything useful.
Defaults tell a similar story. Stress is real. It is also uneven. Fitch Ratings reported that the default rate among U.S. corporate borrowers of private credit rose to 9.2% in 2025 in its monitored universe of 302 companies, with most defaults occurring among smaller issuers with $25 million or less in earnings. That is a serious data point. It is not a complete description of private credit. Fitch’s universe was composed primarily of middle-market companies with $100 million or less in earnings and $500 million or less in debt. A default rate in that population should not be treated as a proxy for the entire market.
Low defaults do not mean nothing is wrong. Elevated stress indicators do not mean the system is failing. They mean investors need sharper distinctions than the current narrative provides.
Private credit has never been a monolith. A loan backed by equipment or inventory, a loan to a private equity (PE)-owned company, a senior secured loan, and a retail-oriented BDC are not the same thing. Yet they are routinely discussed as if they were interchangeable. Treating them as one thing produces conclusions that are directionally meaningless.
Manager selection matters more in private markets than in public ones. J.P. Morgan Asset Management data covering returns from the fourth quarter of 2015 through the fourth quarter of 2025 shows a much wider gap between strong and weak private credit managers than between strong and weak managers in large-cap stocks or bonds. In public equities, the central question is often what to own. In private credit, it is who manages it. Over a decade, the difference between a strong and weak private credit manager can overwhelm the choice between asset classes entirely.
High-quality managers are being tarred by association with weaker ones. The weaker cohort includes software-heavy BDCs that stretched underwriting standards during the 2024 and 2025 fundraising boom, smaller platforms lacking scale or discipline, and semi-liquid structures that overpromised access to money invested in illiquid assets. Retail investors fleeing those products may be making a rational choice. But the exit has been indiscriminate.
A senior secured direct lender with institutional-grade underwriting, a diversified portfolio across hundreds or thousands of borrowers, conservative covenants, and a multi-decade record of positive returns through every vintage year is not the same instrument as a yield-chasing BDC with concentrated exposure to deteriorating borrowers.
The same problem is now appearing in the discussion of AI. AI may indeed pressure some software borrowers. That risk deserves attention. But it is not unique to private credit. It is a market-wide underwriting issue that happens to be visible inside private credit portfolios.
This is the real knowledge gap in private credit today. Institutional investors with resources and mandates for rigorous manager-level due diligence can separate the asset class from any single fund’s execution risks. Retail investors, by contrast, have largely encountered private credit through products that offered access without enough education and through media coverage that often prizes alarm over nuance. The semi-liquid structures, now causing anxiety, were designed to democratize returns once reserved for institutions. The access was real. The supporting literacy was not.
Private credit will inevitably produce losses. Some structures should never have been sold to retail investors as casually as they were. But none of that requires forcing a diverse market into a single crisis template.
The better warning to retail investors is not “avoid private credit.” It is “understand what you own.” Redemptions are not defaults. Software exposure in itself is not apocalyptic. Default rates without context are just a number. And in private credit, the manager is not a detail. The manager is the investment.
© Copyright 2026. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC, its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
