Ares and Apollo moved to cap fund withdrawals this week. Banks say the stress hasn't spread.
What happened this week
Two of the largest private-credit managers, Ares Management and Apollo Global Management, limited investors' ability to withdraw cash from certain funds this week. The firms put controls in place after a wave of redemption requests, a move aimed at avoiding forced sales of loans that could push asset prices down.
Similar steps have become more common in recent months. Blue Owl Capital has seen a heavy sell-off, its market value plunging roughly 40 percent this year, and managers have wound down at least one retail-focused fund after backers demanded their money back. Fund-level liquidity measures—often described inside the industry as "gates"—are designed to slow withdrawals and give managers time to sell loans in an orderly way or hold them to maturity.
Why private credit worries spread
Private credit is simply loans made outside banks — firms lend directly to companies instead of going through the traditional banking system. Firms that run private-credit funds act a bit like banks: they originate loans to companies and get fees and interest in return. But unlike banks, they operate with far fewer disclosure requirements and lighter regulation. That opacity makes investors uneasy when the macro environment turns rocky.
Higher interest rates, rising inflation and geopolitical shocks have made life harder for many companies — and worries about big tech-driven disruption have only sharpened fear that some borrowers will struggle to repay. Some investors fear that if big swaths of companies default, investors in private-credit funds could face losses, triggering broader market stress.
How managers and banks respond
Fund managers and many market analysts have pushed back on the idea that private credit poses an immediate systemic threat. Bank of America analysts warned last week that misinformation has fed an overreaction in markets.
Managers say they keep leverage low and build liquidity buffers into their portfolios to avoid the kind of risky behavior that toppled firms in past crises.
JPMorgan Chase chief executive Jamie Dimon has also sought to put recent failures in perspective. As he put it when asked about early defaults tied to small borrowers, the issue so far looks like "cockroaches" rather than a contagion that could topple the financial system. Those comments echo a broader refrain from large lenders that their balance sheets remain well capitalised and resilient.
Why private credit looks different to banks
Private credit has grown fast. Over the past decade the asset class expanded by roughly 300 percent, and today funds manage more than US$1 trillion in private-credit assets. Investors have been attracted by higher returns: net yields on many private-credit strategies have exceeded 8 percent annually in recent years, well above typical corporate bonds.
Crucially, private-credit funds are typically semi-liquid. Investors can usually redeem, but funds put limits on withdrawals—commonly around 5 percent of assets per quarter—or close gates if redemptions exceed that level. Investors hate the withdrawal caps when they need cash fast, but those caps also slow panicked selling and stop managers from getting forced into fire sales.
That design contrasts with banks, which take retail deposits and face speedier outflows when confidence erodes. The bank runs that toppled a few regional lenders showed how deposit flights can force hasty asset sales. Private-credit funds, by contrast, build in frictions that can prevent the same kind of immediate fire sale.
Where the risks actually are
Market watchers say the main worries lie in a few places. One is concentrated exposure: some funds have taken large positions in particular sectors, including retail and parts of the consumer economy that have underperformed. Another is borrower quality. A handful of speculative or subprime borrowers that used private loans have already filed for bankruptcy, undercutting confidence.
There are also macro risks. If a deeper economic slowdown hits, defaults could rise across a broader set of companies. And a shift in investor appetite—if many limited partners try to pull money at once—could strain managers even if individual loans remain sound.
How big a problem could it get?
Analysts are split: some warn that simultaneous forced sales could amplify stress, while others argue the built-in frictions make private credit less likely to spark a wider banking crisis. Some argue private credit could amplify stress if many managers had to sell similar assets at once. Others say private credit is less likely to cause systemic failure than traditional banking because it tends to use less leverage and because withdrawal breaks give managers breathing space.
The International Monetary Fund estimated that by 2024 about 40 percent of private-credit capital was going to technology companies. That concentration in newer-economy firms—many with limited physical collateral—changes the risk profile compared with traditional bank lending. When companies lack tangible assets, lenders face a tougher recovery path in a default.
Investor response and market implications
Investors have pulled billions from private-credit strategies in recent months. Some big backers demanded redemptions, forcing managers to either trim positions or gate withdrawals. That has knocked valuations at listed private-credit platforms and raised funding costs for managers that rely on market confidence to raise new vehicles.
At the same time, traditional banks appear to be weathering the storm. Large US and global lenders, analysts say, remain well capitalised compared with the distressed parts of the non-bank lending market. That's one reason many market participants see recent turbulence as a stress test for private credit, not an immediate threat to the wider banking system.
What regulators and managers are watching
Regulators say they're watching the expansion of non-bank lending closely, but they lack the routine supervisory tools and disclosure powers that apply to banks. Policymakers have said they will monitor spillovers to the banking sector and the broader economy, but any material policy action depends on whether strains deepen and threaten financial stability.
Managers are watching loan covenants, default rates and investor flows. Many funds have tightened underwriting in recent quarters and are prioritising income and covenant protection over volume. Others are reworking fund terms to make liquidity rules clearer for investors in future vintages.
Bottom line for investors
Private credit still offers higher yields for investors willing to accept illiquidity and opacity. But recent events have underlined that those trade-offs carry real costs when markets swing. Redemption limits can protect remaining investors but also frustrate those who need cash quickly.
For now, the sharpest impact has been on the listed shares of firms that package and distribute private credit and on certain concentrated funds. Banks, by contrast, have so far held up. Whether private-credit stress stays contained depends on default trajectories, investor patience and whether managers can sell or hold loans without large losses.
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The International Monetary Fund estimated about 40 percent of private-credit capital went to technology companies as of 2024.
This article was created with AI assistance.
