Private credit has spent most of the past decade as the good-news story of alternative investing — steady yields, low volatility, and a growing list of converts among institutions and, increasingly, individual investors. In 2026, that story is being tested for the first time by an actual credit cycle rather than a marketing narrative. At Kubera, we think the market is at an inflection point worth explaining plainly, in our own words, because the headlines rarely connect the dots between the pieces.

A Market That Outgrew Its First Stress Test

Private credit has grown from roughly $500 billion to more than $1.3 trillion in the U.S. alone over the past five years, and global assets under management are now estimated at somewhere between $1.5 trillion and $2 trillion, with forecasts pointing toward $3–4 trillion by the end of the decade.^[1][2][3] Direct lending — the core corporate-lending segment of the market — has grown large enough to rival the broadly syndicated loan market in size.^[2]

That scale matters because it means private credit has never really been tested through a full cycle. It grew up during a period of falling and then near-zero rates, abundant capital, and few defaults. 2026 is the first year several major research houses have explicitly framed as the asset class's first genuine test since the 2008 financial crisis.^[3] We think that framing is right, and it's the lens through which the rest of this piece should be read.

What the Loan-Level Data Is Actually Showing

The clearest quantified picture comes from an analysis of 44 publicly reporting business development companies (BDCs) — vehicles that lend to middle-market companies and publish enough detail to track over time. Between year-end 2025 and mid-2026, fair value as a percentage of loan cost slipped from about 99.25% to 97.57%, and loans on non-accrual — where the lender has effectively stopped counting on interest payments — rose from 2.5% to 3.4% of cost, a roughly 36% proportional jump.^[4] On a portfolio cost basis of about $95 billion, that translated into an implied markdown of roughly $2.3 billion.^[4]

Context matters here. Credit-rating data from Kroll Bond Rating Agency shows the weighted-average interest coverage ratio across middle-market loans actually improved to 2.3 at the end of Q3 2025, up from 2.0 a year earlier, and KBRA's forecast default rate for direct lending — about 1.5% for 2025 — remains well below the roughly 3.8% expected for the broadly syndicated loan market.^[5] An earlier analysis of the same BDC universe found first-quarter 2026 unrealized losses equal to 2.35% of net asset value, the largest quarterly hit since 2022.^[6] Two things are true simultaneously: fundamentals are not uniformly deteriorating, and a specific, growing slice of the portfolio is under real pressure.

Software Is Where the Stress Is Concentrating

The sharpest concentration shows up in software lending: roughly 81% of software loans in the BDC dataset were marked below cost, versus about 40% across other industries.^[4] We see four overlapping causes. AI disruption is pressuring older, undifferentiated enterprise-software businesses through slower growth and costly redevelopment. Many of these companies were acquired during the low-rate era at aggressive EBITDA multiples, with debt sized around continued growth assumptions that no longer hold. That debt was frequently floating-rate, so a coupon that was manageable near zero rates becomes a real burden at 10%–13% all-in. And software collateral is often thin — mostly equity pledges, IP, and enterprise value rather than hard assets — so when recurring revenue slips, recovery value can fall just as fast.

The practical lesson: a loan labeled "senior secured" against a software borrower is not automatically conservative collateral. The security behind it can evaporate alongside the business.

The Fraud Cases That Sharpened Everyone's Attention

Two bankruptcies in September 2025 did more than any spreadsheet to focus the market's attention on underwriting quality. Tricolor Holdings, a subprime auto lender, filed for Chapter 7 after allegations that its founders had "double-pledged" the same loan collateral across multiple lenders and asset-backed securities offerings for years — allegations that later became federal fraud charges.^[7][8] Auto-parts maker First Brands Group, backed by Apollo, filed for Chapter 11 weeks later amid its own financing irregularities.^[9] Banks including JPMorgan, Jefferies, and Fifth Third had meaningful exposure to both, and regional bank stocks briefly sold off on contagion fears.^[9]

Most serious research on the episode — including analysis from Cambridge Associates — concludes these were idiosyncratic fraud cases rather than evidence of systemic private-credit weakness, and notes that experienced private-credit managers with close borrower relationships were generally better positioned to catch the warning signs than public-market lenders were.^[5] We largely agree with that read, but we don't think it's a reason to relax: fraud detection depends entirely on the rigor of a manager's diligence process, and that's exactly the kind of thing that's easy to shortcut when capital is abundant and competition for deals is fierce.

The Liquidity Mismatch, Made Visible

The more structurally important story this year has been about liquidity, not credit quality. Blue Owl Capital — one of the largest managers in the space — planned to merge a non-traded BDC into a publicly traded one in late 2025, then abruptly canceled the deal amid market volatility. In the following months, redemption requests at its funds reportedly ran as high as the low-40% range against funds designed to meet only about 5% in quarterly redemptions, forcing Blue Owl to halt tender offers, sell roughly $1.4 billion in loans across its BDC complex, and convert one fund into a slower, drawdown-style vehicle that returns capital over time rather than on demand.^[10][11][12] Separately, investors at Cliffwater's large private-credit fund requested withdrawals equal to about 17% of shares in a single quarter, against a redemption mechanism capped at 5%.^[13]

None of this means those funds are insolvent. It means the underlying loans genuinely cannot be sold or repaid as fast as some investors want their cash back — the exact liquidity mismatch that semi-liquid fund structures are built to manage, and the exact mismatch that shows its teeth only when redemption requests spike all at once.

What Regulators Are Watching — and What They're Not Worried About Yet

Federal Reserve Chair Jerome Powell said in March 2026 that he does not see signs of contagion between private credit and the banking system, describing the sector's troubles as "a correction" rather than the start of a systemic event, while noting the Fed is watching closely.^[14] The Fed's May 2026 financial stability report similarly described redemption-related risks as "limited and manageable," even as it acknowledged that fund outflows had moderately exceeded inflows in the first quarter.^[15] The IMF's head of monetary and capital markets offered a similar assessment, saying systemic risk currently looks contained.^[16] Not everyone agrees — Warren Buffett has pointed to growing interconnection between banks and nonbank lenders as a source of fragility, a view shared by some European bank research.^[17]

Our read: the regulators are probably right that this isn't 2008. But "not systemic" and "not painful for individual investors" are two very different claims, and only the second one matters if you're the one holding an illiquid fund during a redemption freeze.

The Retail Door Is Opening at an Interesting Moment

All of this is unfolding just as private credit becomes more accessible to everyday investors. An August 2025 executive order directed the Department of Labor and SEC to reduce barriers that have kept private equity, private credit, and other alternative assets out of 401(k) plans, and by March 2026 the DOL had advanced a proposed rule establishing safe harbors for plan fiduciaries who choose to include them.^[18][19] Over 90 million Americans participate in employer-sponsored retirement plans that could eventually gain access to this asset class.^[18]

We think this is a good long-term development for portfolio diversification — but the timing is notable. The structures being built for retail access largely mirror the semi-liquid, gated designs that just showed their limits at Blue Owl and Cliffwater. Anyone bringing this asset class to a broader audience has an obligation to be explicit about what "semi-liquid" actually means in a stress scenario, not just what it offers in calm markets.

How This Shapes Our Underwriting at Kubera

None of the above leads us to avoid private credit — it changes where we spend our diligence time. For any credit opportunity targeting mid-teens net returns, we push past the advertised yield and ask:

• How much of the return is cash interest versus payment-in-kind (PIK) interest?
• What percentage of loans is on non-accrual, and how has that trended over the last four quarters?
• What share of assets is marked below 90, 80, and 70 cents on the dollar?
• How concentrated is the exposure to software and sponsor-backed leveraged buyouts?
• What are average debt-to-EBITDA, fixed-charge coverage, and interest coverage — and are EBITDA add-backs inflating borrower earnings?
• Does "senior secured" mean a first lien on hard assets, or only a claim on enterprise value?
• Does the fund itself borrow against its own loan portfolio, and what happens to asset coverage if NAV falls another 5%–10%?
• Are investor distributions funded by cash income — or partly by PIK, asset sales, borrowings, or return of capital?
• What are the fund's actual redemption limits, queues, and gates, and has it ever had to use them?

We get most cautious when four things show up together: high headline yield, substantial PIK income, software concentration, and thin collateral. We're also unusually direct with investors about liquidity terms — including the honest answer that most private-credit vehicles, ours included, are not built for money you might need on short notice.

Where We See the Opportunity

A market correction that scares off weaker capital tends to be good news for disciplined new lending. New originations in this environment can command lower leverage, stronger covenants, better collateral, wider spreads, and larger sponsor equity contributions than were typical during 2021–2023, when capital was abundant and terms loosened accordingly. We share that bias: a carefully underwritten 2026-vintage loan is likely to carry meaningfully less embedded risk than an established 2021–2023 portfolio still working through its legacy assumptions.

Bottom Line

The right question for any private-credit offering was never whether it advertises a 14% return. It's whether that return is earned through genuinely strong, cash-paying loans, honest liquidity terms, and disciplined underwriting — or manufactured through leverage, PIK income, optimistic marks, and fund structures that only work until too many investors ask for their money back at once. Bringing that distinction into the open is the work we intend to keep doing.

This article is for informational purposes only and does not constitute investment, legal, or tax advice. Past performance does not guarantee future results. All investments involve risk, including possible loss of principal.