Investors sought exits equal to 15.4% of net asset value from one large tech-focused private credit fund late last year, underscoring how AI worries have rattled the sector. Managers from Apollo, Ares and Blackstone moved to reassure clients this week, saying software exposure is limited and underwriting remains strong. Analysts warn defaults could climb to around 8% in strained corners of the market, and the debate matters because private credit now sits at scale and any sustained stress could tighten lending to smaller firms.

What happened

Redemptions climbed sharply late last year. Fitch tracked requests at 4.5% of fund net asset value in the fourth quarter of 2025, almost three times the prior quarter. One large tech-focused fund drew exit bids equal to 15.4% of its net asset value, per the same tracking.

Managers moved fast to limit outflows. Ares Management capped withdrawals at 5% in one flagship vehicle after requests surged to 11.6%, and Apollo introduced similar limits in one of its funds. Other firms, including Blue Owl and Cliffwater, have also restricted redemptions as investors hunted for safer places to park money.

Why software is the flashpoint

Analysts say software lenders are under fresh scrutiny because AI could change which software businesses earn enough to service debt. Morgan Stanley strategists, led by Joyce Jiang, warned default rates in direct lending could climb to about 8%, well above historical averages of roughly 2% to 2.5%. Joyce Jiang and her team singled out sectors vulnerable to AI disruption, with software among them.

That warning collided with visible pressure at a few high-profile firms. Blue Owl’s tech-heavy funds have been an obvious target for investors. Blue Owl’s chief financial officer, Alan Kirshenbaum, told investors that loans to software companies made up about 8% of the firm’s total assets under management in the fourth quarter of 2025. Still, Blue Owl’s non-traded private credit funds recorded some of the biggest redemption requests tracked by Fitch.

How managers are answering

Top executives used recent public appearances to push back. Marc Rowan, chief executive officer at Apollo Global Management, said the market is entering a shakeout that will separate stronger managers from weaker ones. Rowan pointed out that equity valuations in software have already collapsed in many cases and argued that senior loans carry different risk than software stocks.

He said software lending is only a fraction of Apollo’s broader loan book.

Michael Arougheti, chief executive at Ares Management, and Jon Gray, president at Blackstone, made similar points in interviews. They emphasised manager-level differences in underwriting and portfolio mix. The point from several bosses was the same: not all private credit books look alike. Some are highly concentrated in software. Others have far broader industry coverage.

Advisers also offered practical guidance. Crystal Cox, senior vice president and certified financial planner at Wealthspire Advisors, said some caution is reasonable but widespread meltdown fears are overstated. Cox recommended that retail investors keep private credit allocations small, suggesting about 5% of a portfolio as a sensible cap to limit liquidity and concentration risks.

Mastheads

Market mechanics behind the stress

Private credit grew rapidly after 2008 when banks pulled back from riskier corporate lending. The asset class expanded into what the Federal Reserve estimated at roughly $1.7 trillion in 2024. Other industry tallies put the sector closer to $3 trillion today. Growth stemmed from steady fee income and floating-rate interest, which looked attractive as central banks hiked rates.

Those same mechanics now cut both ways. Floating-rate loans can lift returns when benchmark rates are high. But rising defaults or downgrades hit portfolios that are less liquid. Managers often use amendment tools, like maturity extensions and covenant waivers, to avoid booking outright defaults. William Barrett, managing partner at Reach Capital, said those so-called shadow defaults act as a release valve. They keep companies solvent short term but delay recoveries and trap capital in restructurings.

Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, described a potential rise in defaults as a "healthy reset" for an asset class that had been treated like a zero-loss product. She said higher default rates would be painful for some funds but could force better underwriting and more realistic valuations across the industry.

Not every fund faces the same risk. Richard Grimm, managing director and head of global credit at Cambridge Associates, said private credit is diverse with many different lending strategies. Grimm noted there are real pockets of concern, but he added that the bulk of funds remain cash generative and diversified.

The biggest danger, analysts say, is concentrated exposure to companies whose business models AI could disrupt. Software-as-a-service companies that charge recurring fees are a logical example.

If AI eliminates demand for a given product or forces steep price cuts, revenue and cash flow could fall. That pressures borrowers’ ability to service loans and raises the risk of covenant breaches or defaults.

Investors have already pulled back. The spike in redemption requests shows liquidity worries have moved beyond headlines into real capital calls. Fund gates and redemption limits help managers manage liquidity mismatches between long-dated private loans and investor expectations for regular redemptions. But such measures can amplify investor anxiety about a product's liquidity when they become frequent.

Some observers compare this to earlier stress tests in other credit markets. Morgan Stanley’s analysts said that even a rise to 8% defaults would be painful but not systemic, partly because leverage in private credit is lower than it was in the run-up to the 2008 crisis. That view reflects the industry's lower reliance on short-term wholesale funding and heavier use of equity-like cushions inside vehicles.

Executives who spoke publicly this week wanted to do two things. One, limit immediate outflows by calming worried investors.

Two, reset expectations about which parts of private credit are exposed to technology risk. Speaking at conferences and on television gave them a platform to stress manager selection and underwriting discipline as the key differentiators going forward.

At the same time, public comments underline how reputational risk can amplify financial stress. A few large, visible funds with software-heavy books can drive broader concern for the whole sector. Managers want to show their books are different.

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Ares capped redemptions at 5% in one vehicle after withdrawal requests hit 11.6%, a concrete step managers have taken to slow the investor exodus.

This article was created with AI assistance.