Private credit defaults just matched their highest level on record. At the same time, investors trying to pull money out are finding the door locked.
The industry shot up from around $500 billion a decade ago to $1.8 trillion, and it's getting tested for the first time.
Private credit is a corner of finance where funds lend directly to companies instead of going through banks. The market grew quickly after 2008 as banks pulled back from riskier lending and private funds rushed in to fill the gap.
KBRA tracks about 3,000 of these borrowers in a $300 billion index. As of Monday, 2.3% of them were in default - the highest reading since the index started in December 2023.
KBRA expects that number to climb to 3.5% by the end of 2026. By loan size, that works out to $7.6 billion in defaulted loans this year, up from $4.3 billion in 2025.
Two pressures are piling on:
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When a private loan defaults, the lender doesn't always lose everything. They claw back what they can - that's the recovery rate.
For small and mid-sized borrowers, recovery is heading the wrong way fast. Lenders got back about 46 cents on the dollar in 2025, and KBRA expects that to drop to 36 cents in 2026.
Big borrowers tell a different story, with lenders still recovering about half their money - and that figure is actually rising. Larger companies tend to have more assets that can be sold off to repay creditors.
So the losses are focused on the smaller end - the companies hardest to refinance and easiest to write off.
KBRA's Eric Rosenthal called the recovery picture "more worrisome" than the default rate itself. Lower recoveries mean each defaulted loan eats deeper into a fund's returns.
Investors are already trying to leave, with about $13 billion in withdrawal requests hitting private credit funds in the first quarter.
BlackRock capped withdrawals from its main private credit fund last week, the second quarter in a row it's done so. These caps - called "gates" - let funds limit how much money can be pulled in any given quarter.
Other funds are doing the same, leaving investors who want out with nowhere to go.
Most of that money belongs to pension funds, endowments, and wealthy individuals. They locked it up for years in exchange for higher yields - without the right to demand it back fast.
For the first time, that lockup is being tested at scale.
Defaults are one problem - getting your money back is another.
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