Why investors are pulling out of private credit - marketplace.org

Investors retreat from private credit

After years of pouring money into private credit, investors are pulling back as high-profile defaults and concerns about artificial intelligence shake confidence in the market.

Since the 2008 financial crisis, investors have loaned nearly $2 trillion through private credit to businesses that were unlikely to get loans from banks. The market expanded as banks became more risk-averse after suffering losses and facing tighter lending regulations, making it harder for some companies, especially mid-sized firms, to borrow.

At the same time, investors were looking for stronger yields. From about 2010 to 2024, private credit delivered returns of roughly 8% to 10%, while borrower defaults remained relatively low.

Why confidence is fading

That optimism has weakened in recent months. Many private credit firms made large numbers of loans in 2021 and 2022, when interest rates were low. Now, with rates higher and many of those loans nearing maturity, borrowers may struggle to refinance and are more likely to default.

Private credit firms have also extended significant loans to software companies, adding another source of anxiety for investors who fear AI could hurt those businesses’ prospects.

The structure of private credit adds to the unease. Unlike traditional banks, private credit firms are not subject to the same disclosure requirements or federal supervision. That makes it harder for investors to see what is happening inside the funds or judge how prepared they are if loans sour.

Withdrawals face limits

With uncertainty growing in private credit and across the broader economy, many investors are trying to pull their money out. That has led some observers to compare the mood to an old-fashioned bank run.

But many private credit funds can restrict how much investors withdraw at one time. As redemption requests rise, a number of funds have begun imposing those limits, slowing investors’ ability to exit even as anxiety spreads through the market.