Blackstone, BlackRock, and Apollo face successive redemption waves: The turning point has arrived for the $3 trillion private credit market.

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Once regarded as one of the world’s largest sources of incremental capital for the global financial system, private credit is now facing its severest test since inception. As defaults rise, redemption waves erupt, and funds successively activate redemption restrictions, the private credit market, with a size of $2.5 to $3 trillion, is shifting from rapid expansion to risk clearance, with the impact beginning to spread to commercial banks, AI financing, and the capital market.

Starting in the fourth quarter of last year, companies such as First Brands and Tri-Color Auto went bankrupt one after another, putting continuous pressure on the credit quality of private credit portfolios. Since the beginning of this year, funds managed by top institutions like BlackRock, Blackstone, Apollo, Cliffwater, and Blue Owl have consecutively triggered redemption restrictions (Gating), with redemption pressure intensifying further in the second quarter. Market participants believe that the private credit market is actually in a stagnant state, and the industry is moving from “restricting redemptions” to “selling assets at a discount.”

Meanwhile, PIMCO has recently made it clear that the global credit default cycle has begun, and the scale of future losses may significantly exceed market expectations. As risks are gradually exposed, long-term funds such as pensions, insurance capital, and high-net-worth investors will bear the brunt, while commercial bank lending and AI data center financing may also be affected in a chain reaction.

From Bank Retreat to Capital Frenzy: Rapid Expansion of Private Credit

The private credit market was born after the 2008 global financial crisis.

After the crisis, stricter regulation forced commercial banks to pull back from high-risk lending, while non-bank financial institutions quickly filled this gap. The direct lending market, represented by private credit funds and Business Development Companies (BDC), swiftly rose, mainly attracting capital from pensions, insurance companies, endowments, and high-net-worth investors.

Unlike publicly traded high-yield bonds, private credit loans are typically held to maturity, are not publicly traded, and do not require daily mark-to-market. For borrowing companies, this means more efficient financing, more flexible terms, and greater confidentiality; for investors, this means higher yields than public bonds, with smaller fluctuations in the book value. But this “low volatility” mainly comes from the valuation method, not from the risk itself.

Because assets are self-valued by funds and lack public market pricing, credit deterioration is often not immediately reflected in net asset value. Meanwhile, a large number of higher-risk borrowers gradually moved away from the public bond market, which actually improved the overall credit quality of public junk bonds.

In recent years, the scope of private credit business has also been expanding, from mid-sized firms with annual revenue of $10 million to $1 billion, gradually extending to large-scale M&A financing and AI infrastructure construction. In November last year, Morgan Stanley estimated that up to half of the $1.5 trillion of external financing needed for future AI data centers could come from the private credit market.

Fee-Driven Capital Fervor, Credit Standards Begin to Loosen

The explosive growth of the industry is driven by an extremely attractive profit model.

Private credit funds typically charge a total fee of 3%-4% of net assets—lower than private equity funds, but far higher than traditional fixed income products. This model has attracted a flood of Wall Street institutions and sustained capital inflows.

Market estimates indicate that between 2024 and 2025, the industry’s assets under management are expected to grow by 50%-75%, with an overall size now reaching $2.5 to $3 trillion. During this same period, much of the new commercial lending in the US has actually gone to these non-bank lenders.

However, capital was growing much faster than high-quality borrowers.

With intensifying competition, lenders are forced to accept weaker credit quality and looser covenants in order to maintain lending velocity. “Covenant-lite” loans have become more common, causing overall sector risk to accumulate—an issue only gradually revealed as defaults began to rise.

Redemption Wave Erupts, Market Liquidity Freezes

As default rates rise, the biggest structural weakness of the private credit market is surfacing.

Because underlying loans lack a public trading market, funds cannot quickly sell assets to meet redemption requests as public bond funds can. Once redemptions reach a preset threshold, funds can only activate redemption restrictions to limit investor withdrawals.

Since the start of the year, flagship products of BlackRock, Blackstone, Apollo, Cliffwater, Blue Owl and other large institutions have been activating such mechanisms, with redemption pressures increasing in the second quarter. Market insiders consider the private credit market to have now entered a “frozen” state.

Although there are still a few new loans, overall deal activity has shrunk sharply. Should redemptions continue to rise, some funds may be forced to sell loan assets below their book value, officially entering a repricing stage.

Compared to the public bond market, an even bigger issue is transparency. External investors can hardly judge a fund’s actual default rate, asset impairment size, or eventual recovery rate; they can only observe the continued outflows of capital and mounting liquidity stress.

Risks Begin to Transmit to Banking System and AI Financing

Private credit does not operate independently; it heavily relies on liquidity support from the banking system.

Currently, banks provide large amounts of leveraged funding to private credit funds by subscribing to financing, NAV financing, and revolving credit lines. Data show that banks’ contingent liquidity exposure to non-deposit financial institutions (NDFI) is around $2.3 trillion, with the share of private credit rising steadily in recent years.

If the private credit sector enters a phase of concentrated default and persistent redemptions, banks may face more requests for liquidity support and further tighten overall lending. This does not necessarily mean a systemic financial crisis, but consumer loans, corporate loans, and real estate financing may all be impacted.

Another potential shock is from AI infrastructure financing. Previously it was generally expected that private credit would supply around half of the external financing for AI data centers. But as capital outflows persist and market liquidity freezes, this channel is clearly shrinking in the short term.

Given that AI-related companies now account for about 45% of the S&P 500’s total market capitalization, if AI capital expenditure slows due to blocked financing, the impact could further hit overall US stock market valuations.

PIMCO: The Default Cycle Has Begun

Fixed income giant PIMCO has recently stated clearly that the global credit default cycle has begun, and future losses may be significantly higher than market consensus.

For private credit, this means that the development logic built over the past decade—relying on an easy financing environment and low default rates—is changing. The ultimate loss-bearers will mainly be pensions, insurance funds, asset managers, and high-net-worth investors, and since many loans are still valued by models, actual losses are not yet fully reflected in the books.

Market participants believe private credit is experiencing the first true credit cycle test since its founding.

As defaults, redemptions, and asset markdowns form a mutually reinforcing negative feedback loop, the credit cycle that previously fueled rapid industry growth is reversing. Whether this adjustment—starting in the private credit market—will further spread to the banking system, the AI investment cycle, or even the stock market could become one of the most closely watched global financial risk variables in the second half of the year.

Risk Warning and DisclaimerMarkets involve risk, and investment requires caution. This article does not constitute individual investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views or conclusions in this article are suitable for their particular circumstances. Invest accordingly at your own risk. ```