Two years ago defaults were abnormally low. Now they're normalizing.
Major private credit firms like Apollo, Blackstone, and Blue Owl report sharply lower returns: Apollo's direct credit funds fell from 2.6% to 0.5% year-over-year. Default rates are normalizing upward while Fed rate cuts remain uncertain, squeezing lender margins and forcing portfolio revaluations across software and vulnerable sectors.
- Apollo's direct credit fund returns fell from 2.6% to 0.5% year-over-year
- Default rates in FS KKR Capital jumped to 8.1% from 5.5% in one quarter
- Private credit assets projected to reach $2.3 trillion in 2026, up from $1.6 trillion in 2023
- Ares Strategic Income Fund faced redemption requests for 11.6% of its $22.7 billion in assets
Private credit funds face a dramatic profitability decline as returns plummet from double-digit figures to near-zero levels, driven by rising default rates, interest rate uncertainty, and unprecedented investor redemption requests.
The private credit market, once the darling of institutional investors chasing double-digit returns, has hit a wall. What was supposed to be a temporary wobble has hardened into something more structural: a reckoning with reality after years of outsized gains.
For nearly a decade, private credit funds had thrived in a peculiar ecosystem. Traditional banks retreated from risky lending. Stock markets stalled without initial public offerings to chase. Interest rates stayed elevated enough to sweeten returns but not so high as to break borrowers. Into this vacuum stepped the giants—Apollo, Blackstone, Blue Owl, Ares, KKR—offering capital to companies that couldn't access public markets. The returns were intoxicating. Double digits became the baseline expectation.
Then the numbers started to crack. Apollo's direct credit funds, which hold investment-grade loans to corporations, returned just 0.5% in the latest quarter, down from 2.6% a year earlier. Blackstone and Blue Owl saw similar declines. Publicly traded vehicles like Ares Capital, Golub Capital, and Sixth Street Specialty Lending were forced to mark down their portfolios—particularly holdings in software companies and other sectors vulnerable to economic stress. Sixth Street even cut its dividend, a signal that sent tremors through the market.
Two forces are squeezing the sector simultaneously. The Federal Reserve has begun cutting rates, but without clarity on where policy is headed, the cost of money sits in limbo. For lenders, this means margins are compressing just as defaults are rising. Jonathan Gray, Blackstone's president, put it plainly: two years ago, default rates were abnormally low. Now they're normalizing. The pressure is relentless—borrowers are straining under interest rates that remain stubbornly higher than expected, and the funds are watching their loan portfolios deteriorate.
The stress is visible in the redemption lines forming outside these funds. In the first quarter, investors in Ares Strategic Income Fund—a $22.7 billion vehicle—requested withdrawals equal to 11.6% of assets. The fund said it would honor only 5% of those requests. Across multiple funds, more than $4.6 billion in investor capital is now trapped behind redemption gates. For retail investors who thought they were buying liquid, stable assets, the realization that their money is locked away has been jarring.
The damage extends to the BDCs—business development companies that channel private credit to mid-sized firms shut out of public markets. FS KKR Capital, KKR's largest retail private credit fund, lost $560 million in the first quarter, nearly 10% of its net asset value, as default rates jumped to 8.1% from 5.5% the previous quarter. Apollo is negotiating the sale of MidCap Financial Investment Corp, a $3 billion BDC where defaults climbed from 3.9% to 5.3% in the same period.
What makes this moment consequential is the sheer scale of the market. Private credit has metastasized from a niche for sophisticated institutions into a central pillar of global debt portfolios. Assets under management reached $1.6 trillion in early 2023 and are projected to hit $2.3 trillion this year. BlackRock forecasts the market will exceed $3.5 trillion by 2028, though that estimate may not survive the current turbulence. The Financial Stability Board has sounded an alarm: the complexity, leverage, and interconnections between private credit funds and banks, insurers, and asset managers create conditions for contagion if stress deepens. The sector insists it remains profitable—the Cliffwater Direct Lending index rose 2.1% in the first quarter, compared to a 0.6% decline in public debt indices—but the gap between yesterday's expectations and today's reality has become impossible to ignore.
Citas Notables
Two years ago we had abnormally low default levels, and now we're seeing some normalization— Jonathan Gray, Blackstone president
La Conversación del Hearth Otra perspectiva de la historia
Why did private credit funds suddenly become so central to how money moves around?
They filled a void. After 2008, banks got cautious about risky lending. Public markets weren't offering exits through IPOs. So companies that needed capital had nowhere to go except to these private funds, which were happy to lend at attractive rates.
And the returns were genuinely that good?
For years, yes. Double digits were normal. But that was partly because the conditions were perfect—low defaults, high rates, no competition. Once those conditions shifted, the math broke.
What changed first?
The Fed started cutting rates, which should have helped. But they didn't commit to a direction, so borrowing costs stayed elevated while lending margins compressed. At the same time, defaults started normalizing upward. Borrowers who'd been fine under low rates began to struggle.
So investors started pulling their money out?
Exactly. When people realized their returns were collapsing and their money might be locked up, they asked for redemptions. Some funds could only honor a fraction of those requests, which spooked everyone else.
Is this a bubble bursting?
Analysts avoid that word, but the expectation reset is severe. The market's still profitable, just not at the levels people got used to. The real question is whether defaults keep rising or stabilize.
And if they keep rising?
Then you're looking at real losses, not just lower returns. And given how interconnected these funds are with banks and insurers, that could ripple outward.