Private credit market faces rising defaults and sector instability

The $1.8 trillion private credit market is facing increasing strain as default rates reach multi-year highs. Analysis of disclosures from major managers, including Ares Management, Blackstone, Blue Owl Capital, and Golub Capital, reveals that non-accruing loans have hit their highest levels in at least five years.

Several factors are contributing to this deterioration. Rising energy costs and geopolitical instability have impacted certain sectors, while the software industry faces significant disruption from artificial intelligence. Valuations for software firms saw notable declines between late 2025 and early 2026, raising concerns about the stability of software-as-a-service (SaaS) business models that comprise a significant portion of many private credit portfolios.

While some industry leaders describe the current environment as a normal credit cycle rather than a systemic crisis, lenders are reporting an increase in borrowers placed on watchlists due to weakening credit quality. Despite these pressures, some funds have managed to recover from previous lows, though the underlying health of many loans continues to show signs of worsening.