NEW YORK — Loan defaults across the largest publicly traded private credit funds climbed to their highest levels in at least five years during the second quarter, undermining industry claims that portfolio health remains intact. Funds managed by Ares Management, Blackstone, Blue Owl Capital and Golub Capital all reported nonperforming loan ratios that exceeded levels reached in 2023, when the Federal Reserve's rate-hiking cycle squeezed corporate borrowers.
Blue Owl's defaulted loan rate hit 2.8 percent in the second quarter, its highest mark in at least five years. That figure emerged on the same quarterly call where co-CEO Marc Lipschultz told Wall Street analysts that "across our direct lending strategy, credit health remains strong." The gap between that characterization and the reported data is what has drawn scrutiny from analysts tracking the sector.
Golub Capital CEO David Golub offered the most direct assessment from inside the industry. "Some in the press have been saying 'Oh no, the sky is falling,' and some of my peers at other firms have been saying 'That's nonsense, there's no problem,'" Golub said. "Neither of those is accurate. We are clearly in a credit cycle. It's not a particularly bad one, but there will be winners and losers."
Private credit funds — also called business development companies, or BDCs, when they trade on public exchanges — operate by pooling client capital and making high-interest direct loans to heavily indebted companies. That strategy, known as direct lending, delivered strong returns through most of the low-rate era and became one of the fastest-growing corners of institutional asset management. Because the four funds in question trade publicly, they are required to update shareholders on loan performance each quarter, providing a level of transparency uncommon in the broader private credit market.
The stress emerging from those disclosures is concentrated in two sectors. Healthcare companies represent the most visible source of deterioration, with dental-service provider Affordable Care cited as one example of borrowers in distress. Energy-exposed industrial businesses have also stumbled — plastic-film maker Loparex, which faces margin pressure from higher oil prices, is another named borrower under strain. The pattern reflects how rising input costs and sector-specific revenue pressure interact with the heavy debt loads that private credit borrowers typically carry.
The larger concern among analysts is not what is already defaulting but what comes next. Software companies represent 20 percent or more of the loan portfolios in many private credit funds. That concentration has attracted attention because artificial intelligence threatens to disrupt the revenue models of enterprise software businesses that were underwritten in a different competitive environment. If default contagion moves from healthcare and energy into software, the scale of the problem changes materially.
The industry has not been passive in responding to the negative coverage. Blue Owl, Blackstone and KKR have each characterized the alarm as media-driven overreaction, pointing to overall portfolio performance as the relevant measure. That defense has limits when the quarterly filings tell a different story: nonperforming loan ratios at all four funds hit levels not seen since at least 2021, and three of the four breached the stress levels recorded during the 2023 rate-shock episode.
Context matters on the other side of the ledger. Current default rates, while at recent highs, remain below the peaks reached during the Covid-19 pandemic or the oil-price collapse of 2015. Both of those episodes produced systemic credit stress across the broader loan markets; the present deterioration has not reached that threshold. Golub's framing of an ongoing credit cycle — with winners and losers — is more consistent with the data than either catastrophist or dismissive readings.
The mechanism of potential recovery is also visible in the data. Losses in private credit portfolios abate when two conditions align: interest rates decline, reducing debt-service pressure on leveraged borrowers, and economic activity stays firm enough to support corporate revenues. Neither condition is guaranteed. With rates remaining elevated to address lingering inflation, the rate relief that would ease borrower distress is not imminent.
Liquidity adds a structural layer to the stress. Private credit loans trade infrequently, so funds cannot rapidly reposition portfolios when deterioration appears. That illiquidity was acceptable when returns were high and clients were buying in. The dynamic shifts when investors request redemptions — several large private credit funds have faced sustained withdrawal pressure over the past year, driven initially by high-profile defaults tied to alleged frauds and AI-disruption concerns around software borrowers. Redemption gates and liquidity constraints built into fund structures have slowed but not stopped that outflow pressure.
Valuation opacity compounds the problem. Unlike syndicated loans or high-yield bonds, private credit instruments lack daily marks from public markets. Net asset values are reported by fund managers, creating a conflict of interest that regulators and litigants have begun to examine. Emerging litigation in the sector now encompasses securities fraud class actions against BDCs alleging misstated valuations, fiduciary duty claims tied to retirement assets directed into illiquid alternatives and contract disputes over redemption mechanics.
For the bond market, the private credit deterioration is a duration and spread story. Direct lending funds effectively serve as the shadow high-yield market, absorbing leveraged borrowers that would otherwise access the syndicated loan or junk bond markets. When default rates in private credit rise, spread compression in public credit markets faces a ceiling — investors repricing risk in BDC portfolios apply the same logic to public leveraged credit. The five-year high in nonperforming loans across Ares, Blue Owl, Blackstone and Golub is a leading indicator worth watching for anyone positioned in high-yield or leveraged loan exposure.
