Private credit funds fall as investors question loan quality
Synopsis
Private credit funds have fallen to steep discounts as investor concerns over loan quality, recession risks and redemption pressures weigh on the $2 trillion private lending industry.
Private credit funds managed by major financial firms have come under pressure as investors grow concerned about the quality of loans held by the rapidly expanding sector. Several publicly traded funds are now trading at steep discounts to their reported asset values, reflecting rising doubts about valuations and credit risks.
Key highlights
- Private credit funds trade at deep discounts to asset values
- Business development companies average 78 cents per dollar of assets
- Funds run by KKR, Blue Owl and Blackstone face investor scrutiny
- Redemption pressures rise across retail-focused private credit vehicles
- Analysts warn recession risks could increase loan losses
Discounts deepen across private credit funds
Publicly traded business development companies (BDCs), a key vehicle used by US investors to access private credit, are trading at significant discounts.
According to data from Morningstar, BDCs are currently valued at about 78 cents for every dollar of reported assets, down from 85 cents at the start of the year and roughly par value in early 2025.
Such discounts suggest investors are increasingly skeptical about the value and quality of underlying loan portfolios.
Private credit, which involves lending directly to companies outside traditional banking channels, has expanded rapidly into a $2 trillion industry.
Major funds trade below asset values
Most of the 20 largest BDCs have seen their share prices fall relative to the value of their underlying assets.
Data from Raymond James shows several major funds trading at steep discounts.
- FS KKR Capital Corp trades at about 51 cents per dollar of assets
- Blue Owl Technology Finance Corp trades at about 68 cents
- Prospect Capital Corporation trades at around 44 cents
Other major funds are also trading below asset value.
- Carlyle Secured Lending trades at about 68 cents
- Blackstone Secured Lending Fund trades near 88 cents
- A $31 billion fund managed by Ares Management, the largest BDC, trades around 94 cents per dollar of assets
Investor concerns weigh on the sector
The recent selloff reflects growing investor concerns about economic risks and the quality of private credit portfolios.
Morningstar analyst Jack Shannon said investors increasingly believe the sector’s rapid expansion has created pressure on lenders.
The industry’s rapid growth has forced firms to compete for deals by offering higher returns or easing lending protections, he said.
Concerns have also emerged around the software sector, a major area of lending for private credit funds, as investors assess the potential impact of artificial intelligence on technology companies.
Redemption pressure emerges
Funds that allow retail investors to redeem shares periodically have also faced withdrawal requests.
Morgan Stanley said it limited redemptions at one of its private credit funds after investors sought to withdraw nearly 11% of outstanding shares.
Other firms have taken similar steps.
BlackRock capped withdrawals at one major fund, while Blackstone’s flagship private credit vehicle experienced a surge in redemption requests during the first quarter.
Blackstone President Jon Gray said long-term institutional investors such as pension funds continue to allocate capital to private credit strategies.
Banks reassess private credit exposures
Some financial institutions have begun adjusting valuations on private credit loans.
JPMorgan has reduced the value of certain loans linked to private credit funds after assessing the impact of market volatility surrounding software companies, according to sources.
Evercore ISI analyst Glenn Schorr said current trading discounts reflect concerns about a potential economic slowdown and higher loan defaults.
Industry assets continue to grow
Despite recent market pressure, the private credit industry continues to expand.
Law firm Eversheds Sutherland estimates around 50 traded BDCs hold more than $150 billion in assets, while over 100 non-traded BDCs hold about $270 billion.
Analysts expect the sector to keep growing as institutional investors search for higher-yielding alternatives to traditional fixed-income investments.
FAQs
Q1: What are private credit funds?
Private credit funds lend directly to businesses outside the traditional banking system, often providing financing to companies that may not access public credit markets.
Q2: Why are private credit funds trading at discounts?
Investors are concerned about the quality of loan portfolios, potential economic slowdown and the possibility of higher default rates.
Q3: What are business development companies (BDCs)?
BDCs are publicly traded investment vehicles that allow retail investors to gain exposure to private credit and other less liquid assets.
Q4: Is the private credit industry still growing?
Yes. Despite recent market pressure, analysts say assets in private credit funds continue to increase as institutional investors allocate more capital to the sector.
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I write about markets, money, and the macro forces that move them. Passionate about turning complex economic trends into sharp, easy-to-understand stories. Off the clock, it’s hip hop, rock, reggae -- and a mix of cricket and basketball.
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