For years, private credit was the golden child of Wall Street — a $2 trillion market offering juicy yields with supposedly lower risk than junk bonds. Pension funds, endowments, and increasingly retail investors piled in. But this week, the cracks became impossible to ignore.
Marathon Asset Management Chairman Bruce Richards dropped a bombshell: private credit has “way too much” exposure to the software sector, and he fears default rates on direct software loans could hit 15%. That’s not a typo. Fifteen percent. In an asset class that has been marketed to Main Street investors as a safe, steady-income alternative to bonds.
The catalyst? Blue Owl Capital — one of the biggest names in retail-accessible private credit — halted withdrawals from one of its funds last week, sending its stock (OWL) tumbling and rattling the broader private credit landscape. It’s the kind of “gates going up” moment that makes investors realize the exit door is a lot narrower than the entrance.
Here’s the deeper problem: private credit has never been stress-tested through a real recession. The industry mushroomed during an era of near-zero rates and easy money. Now, with AI disruption hammering software valuations — the very sector where private lenders parked an outsized chunk of their capital — the chickens are coming home to roost.
Richards isn’t alone in sounding alarms. The MarketWatch editorial board noted that private credit is “easy to enter but hard to exit,” and warned that a wave of retail redemptions could trigger a localized financial crisis. When everyday investors realize they can’t get their money back as easily as they put it in, panic tends to follow. We saw this playbook with real estate funds in 2022 and money market funds in 2008.
To be fair, not everyone is panicking. Brookfield CEO Bruce Flatt said AI-related disruption in private credit poses “little threat to the wider financial system.” And Richards himself noted he doesn’t see broader contagion. But that’s cold comfort if you’re the one holding a locked-up fund with 15% default exposure.
The takeaway for retail investors is simple: know what you own. Private credit funds have been sold as bond alternatives, but they carry equity-like risk with bond-like liquidity — which is to say, very little. If your portfolio has exposure to private credit, especially funds heavy on software loans, now is the time to read the fine print. Because by the time the headlines catch up to the defaults, the exit will already be closed.