Submitted by QTR's Fringe Finance

For most of this year, the private credit story I’ve written about (and warned about) has been about investors trying to get their money out. Now the loans themselves appear to be cracking.

The Wall Street Journal reported yesterday that defaults across several of the largest publicly traded private credit funds have climbed to their highest levels in at least five years, while watchlists of troubled borrowers are simultaneously expanding and investor returns are deteriorating. In other words, the private credit mess I’ve been documenting since last year is entering what could be a far more important phase.

Until now, defenders of the industry could make a relatively straightforward argument. Yes, investors were requesting redemptions, and yes, some funds were limiting withdrawals, but the underlying credit portfolios were supposedly fine. That argument is getting considerably harder to make.

According to the Journal’s analysis, the percentage of nonaccruing loans at funds overseen by Ares, Golub Capital, Blue Owl and Blackstone has reached its highest level since at least 2021. At Blue Owl Capital Corp., nonaccruals reached 2.8% during the second quarter, the highest level in at least five years.

Nonperforming loans at the other three funds examined by the Journal also reached five year highs, surpassing even the levels seen in 2023, when the Federal Reserve’s rate hikes were putting enormous pressure on leveraged borrowers.

And it isn’t just defaults. Private credit funds managed by Ares, Golub and KKR have also reported increases this year in the number of borrowers showing deteriorating performance. Their watchlists are now at their highest levels since roughly 2022 and 2023.

That matters because watchlists are effectively the waiting room for future credit problems. Not every company on one will default, and different managers use different criteria, but when nonaccruals are already rising at the same time the pipeline of potentially troubled borrowers is expanding, it becomes increasingly difficult to dismiss the deterioration as a handful of isolated accidents.

Even Golub Capital co CEO David Golub acknowledged the obvious, telling the Journal, “We are clearly in a credit cycle.”

No shit. And in my opinion, the defaults aren’t going to stop anytime soon.

This is important because it adds another leg to a story I have been following for almost a year. I started warning about private credit last October, when I listed it as one of ten areas of the market I wanted absolutely nothing to do with heading into 2026. Since then, the warning signs have arrived with almost comical regularity.

For months I’ve been arguing that investors are ignoring a growing list of warning signs across the economy and financial markets. Stocks remain in what I believe is a historic bubble. The Federal Reserve remains trapped between stubborn inflation and an equity market that still looks significantly overvalued. Consumers are exhausted and buried under debt, while the bond market continues calling bullshit on the broader narrative.

Private credit fits neatly into that picture because while public markets have spent much of 2026 behaving as though risk has been abolished, underneath the surface investors have been trying to pull billions of dollars out of private credit funds.

I’ve spent much of this year documenting that process. Blue Owl restricted redemptions. Blackstone faced record withdrawal requests. BlackRock limited withdrawals. Morgan Stanley and Cliffwater capped redemptions. Stone Ridge gated investors. Apollo and Ares restricted withdrawals. Barings followed. By June, redemption requests at Cliffwater had climbed to roughly 17%, while Apollo once again limited withdrawals from its $25 billion Apollo Debt Solutions fund after investors requested redemptions equal to 16.8% of outstanding shares.

So we already knew there was a liquidity problem. What the latest data suggests is that we increasingly have a credit problem sitting underneath it. And those two problems can feed each other.

Private credit works particularly well when investors are content to leave their money alone. The basic mismatch is not complicated. Investors want periodic liquidity while funds own loans to private companies that don’t trade continuously and may be difficult to sell at anything resembling their stated valuation during periods of stress.

As long as relatively few investors request their money back, everything works. When everybody heads for the door, redemption caps kick in. That’s what they’re designed to do. The uncomfortable question is what happens if investors keep asking for their money back quarter after quarter while the underlying loans simultaneously deteriorate.

As defaults rise, funds have to recognize losses or mark down loans. Returns deteriorate. Investors have less reason to tolerate illiquidity, more of them request redemptions and fundraising becomes more difficult. That matters because private credit has become an important refinancing mechanism for leveraged companies. If less capital enters precisely when borrowers need to refinance, weak companies face higher borrowing costs, worse terms or potentially no refinancing at all.

Perhaps the most interesting part of the Journal’s reporting is not simply that defaults are rising. It’s when they’re rising. The U.S. economy has not fallen into some catastrophic recession. Economic activity remains relatively robust, yet private credit stress is already increasing.

If borrowers are increasingly landing on watchlists and loans are increasingly going nonaccrual while the economy is still holding together, what happens if economic growth rolls over? What happens if inflation prevents the Fed from delivering the kind of rate cuts heavily indebted borrowers want?

Then there is software. The Journal notes that software companies make up 20% or more of the loans in many private credit funds. This is something I’ve been writing about since March, when the Journal previously reported that private credit’s exposure to struggling software companies was significantly larger than advertised.

So far, many of the bad loans showing up are concentrated elsewhere, including healthcare businesses and companies affected by higher oil prices. But software remains the elephant in the room. Private equity spent years buying software companies because recurring revenue, high margins and predictable growth supposedly made them ideal leveraged assets. Private credit financed a lot of those transactions. Then AI showed up.

Meanwhile, the economics that attracted investors to private credit are becoming less compelling. Private credit funds routinely produced annual returns of 10% or better in previous years, according to the Journal. Today, even stronger funds are struggling to produce 7%. One troubled KKR managed fund lost 6.55% during the 12 months through June after losing 9.17% in the previous period.

That creates an obvious question. Why exactly should investors accept limited liquidity, opaque marks and growing credit risk if the return premium they receive for doing so keeps shrinking?

This is why I think looking at the latest default figures in isolation misses the larger story. I’ve been tracking this deterioration since October 2025. Since then we’ve watched markdowns appear, redemption requests surge, funds cap withdrawals, investors return the following quarter asking for even more of their money and concerns emerge about the industry’s enormous software exposure.

Now defaults across several major private credit funds have reached five year highs while watchlists of troubled borrowers are expanding. Any one of these things can be explained away. Taken together, they constitute a trend, and the trend isn’t improving.

Private credit hasn’t really been stress tested at its current scale. The asset class exploded during an extraordinary period of cheap money, enormous private equity activity and relentless investor demand for yield. Now dealmaking has slowed, portfolio companies are missing expectations, defaults are rising, watchlists are expanding, returns are declining and investors are simultaneously asking for billions of dollars back.

For nearly a year, every new crack in private credit has been dismissed as isolated. First it was markdowns. Then record redemption requests. Then redemption caps and repeated redemption caps. Now nonaccruals are reaching five year highs.

I don’t think the defaults are done. And if they continue rising while redemption requests remain elevated, private credit could find itself confronting both sides of the problem at exactly the wrong time, with investors wanting their money back while borrowers increasingly can’t pay theirs.

That’s when this story gets considerably uglier.

Tracking the private credit meltdown:

• August 11, 2026 - WSJ notes that defaults continue to grow to five year highs

• June 23, 2026 - Apollo gates investors for another quarter after they sought to redeem 16.8% of outstanding shares

• June 3, 2026 - Cliffwater redemptions hit 17% and Partners redemptions hit nearly 10%

• April 6, 2026 - Barings caps redemptions at 5% after investors seek to withdraw 11.3% in Q1

• April 2, 2026 - Blue Owl hit with “unprecedented” withdrawal requests

• March 31, 2026 - WSJ reports that software exposure among private credit funds is larger than disclosed

• March 27, 2026 - Cracks in private credit reach UBS Real Estate fund, forced to suspend withdrawals

• March 24, 2026 - Ares restricts withdrawals on its Strategic Income Fund after redemption requests hit 11.6%

• March 23, 2026 - Apollo caps withdrawals on its $25 billion Apollo Debt Solutions vehicle after redemptions hit 11%

• March 19, 2026 - Stone Ridge’s Alternative Lending Risk Premium Fund gates redemptions after overwhelming redemption requests

• March 16, 2026 - Apollo co-president says that “all” marks in parts of the private markets industry are “wrong”

• March 11, 2026 - Morgan Stanley and Cliffwater cap redemptions in $8 billion, and $33 billion funds, respectively

• March 6, 2026 - BlackRock begins limiting withdrawals from its $26 billion HPS Corporate Lending Fund

• March 3, 2026 - Blackstone faces “record” redemptions from its flagship private credit vehicle, investors sought to redeem 7.9% of fund’s $82B in assets

• February 19, 2026 - Blue Owl restricts redemptions from its retail private credit fund

• January 26, 2026 - Blackrock takes 19% markdowns on TCP Capital Corp.

• December 17, 2025 - Blue Owl walks away from $10 billion data center deal for Oracle

• October 15, 2025 - QTR warns private credit is one of 10 areas of the market that I would avoid heading into 2026

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