Key insights
- Redemption activity across private credit interval funds increased meaningfully in early 2026, testing liquidity management and investor confidence rather than underlying credit quality.
- Managers are meeting elevated redemption demand within the interval fund structural framework, exercising discretion to increase quarterly repurchases.
- Rising defaults remain concentrated in smaller, more leveraged issuers, while larger, diversified portfolios continue to demonstrate resilience.
- Secondary transactions are emerging as a normalized liquidity and portfolio management tool across private credit managers.
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Over the past several years, private credit has become an important portfolio addition for investors, supported by attractive yields and relatively stable cash flows compared with traditional public credit markets.
More recently, increased redemption activity has shifted investor attention toward liquidity dynamics rather than return generation..
While headlines have focused on pressure within select interval funds, the private credit market isn’t experiencing widespread defaults or a collapse in income. Instead, today’s environment reflects a transition rather than a breakdown.
Private credit isn’t facing a crisis, it’s facing a liquidity and confidence test. As this cycle matures, differences in portfolio quality, liquidity management, and manager execution are increasingly important for investors.
The rise of private credit: Bank disintermediation created the opportunity
Bank disintermediation reflects a structural shift in how credit is supplied, as regulatory constraints, higher capital requirements, and balance sheet discipline limited banks’ willingness to lend to middle market borrowers.
In response, private lenders stepped in to provide flexible, customized financing outside traditional banking channels, often with stronger covenants and higher yields.
This transition expanded private credit, while transferring liquidity and refinancing risk from bank balance sheets to private lenders. As a result, credit availability has remained intact, but outcomes are increasingly shaped by manager underwriting standards and liquidity management rather than bank policy cycles.
This shift created access to higher income and more customized credit exposure for investors, while placing greater importance on manager selection and liquidity planning across market cycles.
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What is private credit?
Private credit is a broad and diverse asset class, encompassing multiple lending strategies with distinct risk, liquidity, and collateral profiles. Unlike public credit markets, private credit relies on negotiated terms, longer holding periods, and contractual cash flows rather than daily market pricing.
As a result, performance and liquidity outcomes can vary significantly by strategy, portfolio construction, and manager execution, particularly during periods of market stress.
The three primary segments of private credit include:
Direct lending
Representing the largest segment of the private credit market, direct lending typically involves senior secured, first lien loans to middle market companies. These loans are commonly floating-rate, privately negotiated, and held to maturity, with returns driven by income rather than capital appreciation.
Senior real estate-backed lending
These are loans secured by commercial real estate assets, often at conservative loan-to-value ratios. Cash flows are supported by property income and hard collateral, providing downside protection, though performance can be sensitive to property valuations and refinancing conditions.
Asset-backed lending
Asset-backed private credit is secured by contractual or financial assets such as receivables, equipment, or consumer credit pools. Risk is tied more closely to asset performance and structural protections than to corporate earnings, offering diversification from traditional corporate credit exposure.
Understanding these distinctions is increasingly important, as liquidity dynamics and risk outcomes can vary materially across each segment, particularly in periods of market stress.
What is the current state of private credit?
The private credit market isn’t experiencing a broad-based collapse in income or widespread defaults. Rather, it’s transitioning from a cycle defined by rapid asset growth and yield enhancement to one focused on:
- Liquidity management
- Transparency and valuation discipline
- Manager discipline and communication.
This environment is separating strong platforms with diversified portfolios and multiple funding levers from weaker structures relying on accommodative capital markets.
Related to private credit, the public credit markets, particularly bank loans and syndicated loans, continue to serve as a key barometer for broader credit conditions. These instruments provide similar floating-rate exposure, but with daily liquidity and transparent pricing.
Bank loan and syndicated loan markets have remained orderly and functional even amid heightened volatility and private market redemption pressure. The stability and liquidity of public credit underscore current stresses aren’t systemic, but rather concentrated in select private vehicles where liquidity is contractually constrained.
Private credit isn’t facing a crisis — it’s facing a liquidity and confidence test.
Redemptions are testing liquidity management and communication — not structure
Interval funds and semi-liquid vehicles are operating as designed. Structural features such as quarterly caps, pro rata redemptions, and gates are being applied consistently and within regulatory guidelines.
What has shifted is investor perception. When redemption requests materially exceed quarterly limits, the focus moves away from legal structure and toward manager control, liquidity planning, and communication quality.
First quarter 2026 redemption activity across selected funds (requested/paid):
- Cliffwater Corporate Lending Fund (CCLFX) — 14%/7%
- North Haven Private Income Fund — 10.9%/5%
- HPS Corporate Lending Fund — 9.3%/5%
- Blackstone Private Credit Fund — 7.9%/7.9%
Interval fund redemption gates help protect remaining investors by preventing forced asset sales, preserving portfolio integrity, and ensuring that liquidity pressures are managed equitably rather than to the detriment of long‑term shareholders. Taken together, first‑quarter redemption activity reinforces that interval funds are functioning within their intended design, even as elevated redemption requests test investor expectations around liquidity.
Secondaries are becoming a liquidity tool
GP-led credit secondaries are increasingly being used not just for legacy clean-ups, but as an active portfolio management tool to:
- Generate liquidity for redemptions
- Rebalance sector and issuer concentration
- Reduce reliance on incremental leverage
Multiple funds have come to market this year with a portion of their portfolio, suggesting secondary-driven liquidity may become a more normalized feature of the private credit market.
From an investor perspective, this evolution supports more flexible capital management and reinforces the view that many private credit vehicles are operating as designed — using structural tools to manage liquidity in a more challenging market environment.
Private credit defaults have been rising
Private credit defaults increased meaningfully through 2025. Fitch Ratings reported a 9.2% default rate in 2025, up from 8.1% in 2024, across a monitored portfolio of 302 middle-market companies.
Key observations from Fitch:
- Defaults were concentrated among smaller issuers with $25 million or less in EBITDA
- Defaults were diversified across sectors
- No defaults were recorded in software, which Fitch categorizes within broader sector classifications when applicable
- Floating-rate debt tied to persistently high policy rates was a primary catalyst
Default-related stress has been concentrated among funds focused on smaller companies, while funds lending to larger, more resilient issuers — those with EBITDA of $50 - $200 million have — remained relatively insulated from the primary sources of recent market stress.
CLA’s perspective on private credits
Our investment committee has been closely monitoring private credit closely since early 2023, consistently reinforcing appropriate position sizing given the semi-illiquid nature of these investments, and adjusting portfolios that were over-exposed to these investments.
We believe private credit should represent 3 – 8% of a diversified total return portfolio. For allocations above 5%, we recommend using a combination of both corporate lending and real estate-backed private credit.
While direct lending is facing pressure from fund-specific outflows and heightened headlines, the asset class itself remains functional.
Broader credit markets — including bank loans and syndicated loans, the public counterparts to private credit — continue to operate normally and do not exhibit signs of a systemic crisis.
How CLA can help with investments in private credit
At CLA, we take time to understand what matters most to you and build portfolios with clarity and purpose. By thoughtfully combining equities, fixed income, and select alternatives, we aim to create balance, smooth the ride, and support your financial path through a wide range of market environments.
If you’re curious how your current investment mix aligns with where you want to go, we’re here to help you look at the full picture and make confident, informed decisions.
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