Private Credit: What’s Actually Going On Right Now

Private credit has been the hottest corner of investing for the past five years. It has grown into a $3.5 trillion global market by the count of industry group AIMA, offering yields that public bonds cannot match and access to the kind of lending that institutions used quietly for decades while everyone else was locked out.

That is the brochure version. The picture in 2026 is more complicated. Private credit is going through its first real stress test, and while parts of the market are holding up well, other parts are not. Telling the difference has never mattered more, so this post covers what is actually happening, why it matters, and where the genuine opportunity still lives.

Start with the number everyone quotes: private credit defaults are running at just 1 to 2%. That figure is accurate as far as it goes, but it only counts loans that formally failed through missed payments or bankruptcy. It leaves out every loan that got quietly rescued instead, like the maturity pushed back because the borrower could not pay on schedule, or old debt swapped for new debt under pressure.

When Fitch Ratings counts those rescues too, the default rate comes out at 5.8% for the twelve months through January 2026, the highest reading since the firm began tracking it.

It is the same market either way. The difference is whether you count the patients in the ICU. JPMorgan CEO Jamie Dimon captured the mood last fall, speaking after two sizable borrowers went bankrupt in the same month: “When you see one cockroach, there are probably more.”

There is a term worth adding to your vocabulary here: payment-in-kind, or PIK. A PIK provision lets a borrower skip the cash interest payment and add the amount to the loan balance instead, so a company that owes $500,000 in interest simply ends up owing $500,000 more. It is the corporate version of paying one credit card with another.

Used sparingly, PIK is a legitimate tool that gives a healthy company flexibility. The problem is that it is no longer sparing. Publicly traded private credit funds now book an average of 8% of their income through PIK, and the Financial Stability Board flagged its steady rise in a formal report on the industry this spring. That income exists on paper but not in the bank, and when a borrower flips to PIK, it is rarely because business is booming. The part worth sitting with is this: on a quarterly statement, PIK income looks exactly like the real thing.

Now the structural issue that deserves far more attention than it gets: the biggest firms in private credit increasingly sit on both sides of their own deals.

Apollo owns Athene, one of the largest life insurers in America, and KKR owns Global Atlantic, another major insurer. The loop works like this: the firm’s credit team makes a loan, the firm’s insurance company buys that loan as an investment, and the firm decides each quarter what the loan is worth, collecting fees along the way. Wall Street calls the arrangement vertical integration. I would call it grading your own homework.

In a normal market, a loan gets tested when an outside buyer negotiates the price. Inside this loop there is no outside buyer, and in many cases even the credit rating comes from a small agency selected by the same firm. This matters well beyond Wall Street, because millions of Americans own annuities issued by these insurers, and the solvency math behind those annuities leans partly on valuations set by the people who sold themselves the assets. Regulators have noticed. The U.S. Treasury convened insurance regulators earlier this year to discuss exactly this issue.

If you want to see what self-graded homework looks like when it fails, consider Renovo, a home improvement lender that collapsed last November. CNBC reported that its lenders carried the debt at full value, 100 cents on the dollar, until shortly before marking it down to zero. Not 80 cents first, not 50. Par, then nothing.

Last August, an executive order opened the door for private credit inside 401(k) plans, a move the industry celebrated as democratization. Within six months, several large retail-facing private credit funds had frozen withdrawals because too many investors wanted out at once.

I am not calling that a conspiracy. I am calling it a cycle. The widest doors tend to open near the top, and the people who walk in last are usually the ones who absorb the correction. If private credit shows up on your 401(k) menu, read the liquidity terms twice before you read the yield once.

Consider what happens when different kinds of loans go bad. When a software company defaults, the lender recovers what it can from a business made of code and departed employees. When an aircraft loan defaults, the lender repossesses an aircraft, and when a mortgage defaults, there is a building. That difference in what stands behind the loan is the appeal of asset-based lending, where credit is secured by real, sellable property: planes, buildings, equipment, and increasingly the data centers powering artificial intelligence.

Morgan Stanley projects that private lenders will fund more than half of the roughly $1.5 trillion in data center construction expected through 2028, and there is a useful hedge built into that trade. Even if AI ends up disrupting the software borrowers, the computing infrastructure serving AI still gets built and still needs financing.

Every credit downturn produces the same recurring character: the forced seller. It might be a pension fund that finds itself overweight, or a fund that promised quarterly withdrawals it can no longer honor. Whoever it is, they need out, and they will accept a bad price to get out. Funds designed to buy from them, spanning distressed debt, special situations, and secondhand fund stakes, have quietly raised roughly $100 billion over the past two years according to industry fundraising data, which amounts to a war chest assembled for exactly this moment.

History is fairly blunt on the pattern. The 2009 and 2010 vintages, built from the wreckage of the financial crisis, remain the benchmark years in credit investing, and money invested when headlines were ugly has almost always outperformed money invested when everything felt fine. It just never feels that way at the time.

The practical takeaway is that the label on a fund tells you almost nothing. Two funds can both be called direct lending and share little beyond the name, with one holding senior, well-protected loans to healthcare companies and the other holding junior IOUs from struggling software firms dressed up with a similar yield. Yield itself has stopped working as a quality signal, because a high stated number might reflect strong loans or might reflect paper income piling up on loans that will never pay it, and you cannot tell which from the fact sheet.

All of which lands on a theme that runs through this entire series: in private markets, the manager is the investment. The managers who stayed boring while everyone else got creative are about to have the best years of their careers.

If you already hold private credit, there is no need to panic, and in an illiquid fund panic is not really on the menu anyway. What this moment calls for is a set of pointed questions for your manager, or for your advisor to ask on your behalf.

• How much of the fund’s income is PIK, and is that share rising?
• What percentage of loans has stopped paying?
• How much software lending sits in the portfolio?
• And have the reported values actually moved this year, or have they stayed suspiciously flat while everything comparable fell?

A fund value that never budges in a year like this one is not stability. It is a question nobody has answered yet.

Sources: AIMA, Financing the Economy 2025 (market size); Fitch Ratings, trailing 12-month default rate (Jan 2026); CNBC (Dimon remarks, Oct 2025; Renovo, Jan 2026); Financial Stability Board, Report on Vulnerabilities in Private Credit (May 2026); Moody’s and Barclays insurer analyses (2026); Morgan Stanley private credit outlook (data centers); With Intelligence, Private Credit Outlook 2026 (PIK and distressed fundraising); Cleary Gottlieb 2026 outlook (401(k) executive order).

Any statistics or third-party information referenced are believed to be reliable but cannot be guaranteed for accuracy or completeness. Examples provided are illustrative and for illustrative purposes only and do not represent actual client experiences or guaranteed outcomes.

Retirement planning strategies should be evaluated based on an individual’s unique financial situation, goals, and risk tolerance. Before making financial decisions, individuals should consult with their financial, tax, and legal professionals.

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