Goldman Sachs: Will Private Credit Trigger a New Financial Crisis?

Against the background of intensifying turmoil in the private credit industry and successive redemption restrictions by several leading asset management institutions, Goldman Sachs economist Manuel Abecasis has made a clear judgment: the pressure within private credit itself is unlikely to trigger large-scale macroeconomic spillover effects, but broader tightening of financial conditions poses a greater threat.

Alternative asset management giants such as Apollo, Ares, and BlackRock have recently imposed restrictions on investors due to a surge in redemption requests from retail and high-net-worth clients, raising widespread concerns about whether the private credit crisis will spill over. In its report, Goldman Sachs uses a default scenario stress test framework to systematically assess the potential impact of private credit losses on the overall scale of lending and GDP growth, pointing out that even in the extreme scenario where the default rate rises to 10%, the drag on GDP is only 0.2% to 0.5%.

The report also notes that banks have recently accelerated lending to businesses, corporate balance sheets remain generally healthy, and growing demand for AI-related investment will support the credit market and partially offset the effects of private credit tightening. Goldman Sachs emphasizes that the bigger risk is: uncertainty over AI prospects could cause overall credit spreads to widen, or lead to broader tightening of financial conditions.

However, there are also more pessimistic voices in the market. UBS has recently raised its baseline forecast for private credit default rates to 15%—far exceeding Goldman Sachs' worst-case scenario—and warns of possible "chain defaults" and widespread transmission risk, forming a sharp contrast with Goldman Sachs' conclusions.

Private Credit Scale: Rapid Expansion but Still Marginal

According to the Goldman Sachs report, the private credit industry currently holds about $1.7 trillion in corporate leveraged loans, accounting for about 4% of all credit in the private non-financial sector.

Goldman Sachs points out that, despite rapid expansion in recent years, its scale remains limited relative to the overall financial system. By comparison, prior to the 2008 financial crisis, residential mortgage loans accounted for about 45% of private non-financial sector credit—much higher than private credit's current level. Goldman Sachs uses this to refute views equating current private credit pressures with the 2008 financial crisis, including similar analogies made previously by BofA strategist Michael Hartnett.

Regarding current loan performance, available indicators cited by Goldman Sachs show that as of Q4 2025, overall loan performance is basically on par with the average since 2023. The proportion of underperforming loans in private credit portfolios has slightly increased in the second half of 2025, but remains below 2023 levels. In addition, the proportion of loans with Payment-in-Kind (PIK) options has also increased, but this mainly reflects that recent new loans increasingly include PIK in their terms design, rather than borrowers being forced into PIK due to financial stress—the proportion of borrowers proactively switching into PIK has remained stable recently.

Software Exposure: Most Concentrated Risk Point

The disruptive impact of the AI wave on the software industry is a core catalyst for the recent sharp deterioration in sentiment in the private credit market. Goldman Sachs equity analysts estimate that software accounts for slightly less than 25% of the loan portfolios of business development companies (BDCs). Meanwhile, technology borrowers have higher leverage than other types of private credit borrowers, and recovery rates on software loans may be lower than in other sectors—because software companies lack tangible assets to serve as collateral.

In addition to software exposure, incidents of fraud in a few large loans and accumulated credit risks from rapid private credit expansion in recent years have also heightened concerns about worsening loan quality. Goldman Sachs further notes that the degree of connection between private credit and other financial institutions has deepened in recent years: insurance companies have significantly increased their allocations to the sector, employed more leverage, and depended more on short-term wholesale funding; banks have also formed closer links to private credit through lending and credit lines.

Stress Test: Quantifying Impact Under Two Scenarios

Goldman Sachs set two default scenarios for stress testing, and conducted quantitative assessments based on equity analysts' observations of inter-institutional connections, conservative estimates of recovery rates by credit strategists, and the degree to which various types of financial institutions would shrink lending willingness under shock.

Under the baseline scenario, the private credit default rate rises from about 1% in 2025 to 3–4% (corresponding to the low end of historical leveraged loan default rates), generating about $45 billion in additional defaults, which translates to about $25 billion in actual losses assuming a 40% recovery rate. The drag on the loan stock in this scenario is around 0.2% or less (about 1.5% or less of total new loan flows), and the drag on GDP is about 0.1%.

Under the extreme scenario, the default rate rises to 10% (upper bound of historical leveraged loan ranges), producing about $150 billion in defaults, which translates to about $90 billion in losses at a 40% recovery rate; if recovery rates for software loans fall to 30%, losses would expand to about $105 billion. Considering the shocks to banks and other private credit funding entities, this scenario may reduce private non-financial sector credit by $350–$400 billion, roughly 5–6% of total new loan flows, and drag GDP by 0.2% to 0.5%. For comparison, during the 1990 recession and savings & loan crisis, private sector loan flows fell about 30%, and after the 2008 crisis, fell about 55%.

Goldman Sachs also notes that loan contraction does not transmit proportionally to output declines—unaffected lenders can partially fill gaps. Based on its vector autoregression model built from financial conditions indices and Fed Senior Loan Officer Survey (SLOOS), a 1% drop in loans-to-GDP ratio corresponds to an actual GDP decline of about 0.3%–0.4%.

Controversies and Limitations Behind the Optimistic Conclusion

Goldman's conclusion rests on several important premises, which the report explicitly states: that the Iran war can be quickly resolved without triggering global stagflationary recession, and that the AI bubble does not burst. The report also admits that if shocks trigger mass panic at the market level, causing lenders to proactively shrink lending beyond direct exposures and regulatory constraints, indirect effects may exceed what the current models estimate.

Goldman Sachs further adds two technical points: First, defaults on private credit loans are not as directly equivalent to monetary losses as other types of loans, because private credit contracts typically include more covenants, allowing default protection to be triggered before borrowers miss interest payments; second, private credit loans currently occupy a relatively senior position in borrowers' capital structures, which means higher private credit default rates will likely overlap heavily with losses in other asset classes, constituting a negative factor for the overall market.

In contrast, UBS’s baseline scenario—15% default rate—already far exceeds Goldman Sachs’ extreme assumption and warns of possible "chain defaults" and broad transmission effects. The significant divergence between the two institutions reflects the high uncertainty in market assessments of private credit risk trajectories and suggests that investors should exercise caution when referencing institutional forecasts.

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