Private Credit Hits $3.5T as Sector Faces First Real Stress Test

What's New

PRISM's 2026 Private Credit Outlook reveals that global private credit assets under management have surpassed $3.5 trillion, with capital deployment reaching $592.8 billion in 2024, a 78% year over year increase. The report frames this as a defining moment: after 16 years of benign conditions, the asset class is transitioning from alternative investment to mainstream allocation while simultaneously facing its first real test of underwriting discipline. Apollo characterizes the shift as moving from a seller's market to a buyer's market, creating both opportunity and complexity for investors navigating 2026.

Why It Matters

Private credit's mainstreaming carries significant implications for institutional and retail investors alike. With JPMorgan recommending 10 to 30% alternative allocations in traditional portfolios and Trump's August 2025 executive order opening 401(k) plans to private credit, the $12.5 trillion defined contribution market now has potential access. However, Morningstar DBRS has issued a negative outlook citing margin compression, while Howard Marks warns that untested underwriting standards from years of easy conditions may now be exposed. The widening gap between top tier managers and average performers makes selectivity the critical success factor.

Big Picture Drivers

• Retail expansion: Wealth management is now the fastest growing client segment, with 75% of managers citing it as their primary growth channel and semi liquid fund AUM crossing $500 billion.

• M&A revival: LBO volume grew approximately 40% year over year in late 2025, with median PE hold times reaching 3.8 years, creating pressure for exits and new transactions.

• Bank partnerships: Traditional banks have shifted from competing to partnering, with $96 billion in loan commitments to private credit vehicles including JPMorgan's $50 billion commitment.

• Geographic diversification: Europe represents 30% of global AUM while Asia Pacific is projected to grow from $59 billion to $92 billion by 2027 at a 16% compound annual growth rate.

• Asset based finance: 65% of managers identify ABF as having the highest growth potential, with Apollo projecting the total addressable market at $40 trillion.

By The Numbers

• Global AUM: Private credit assets under management have reached $3.5 trillion globally, cementing the asset class as a mainstream allocation.

• Projected yields: First lien direct loans are expected to deliver 8.0% to 8.5% returns in 2026, down from 10%+ peaks but still well above investment grade alternatives.

• Default pressure: Middle market default rates have risen to 5.5%, with 65% of managers expecting loss rates to increase over the next two years.

• Concentration risk: Software and technology companies represent 20% to 30% of private credit portfolios, the single largest sector exposure now facing AI disruption threats.

• Secondaries surge: Credit secondaries volume has grown from $6 billion in 2023 to an expected $17 billion plus in 2025, with projections reaching $50 billion within 3 to 5 years.

Key Trends to Watch

• Software disruption: Marathon Asset Management has halted all software lending entirely, predicting sector defaults will triple over 5 to 7 years as AI creates existential challenges for companies that cannot adapt.

• Secondaries explosion: Transaction volume surged nearly threefold in two years, with Coller Capital predicting the market could reach $50 billion within 3 to 5 years and eventually surpass private equity secondaries.

• Transparency pressure: Six suspected fraud cases emerged in recent months including First Brands' $5.7 billion discrepancy, intensifying demands for disclosure on borrower earnings, PIK usage, and valuation methodologies.

• Manager consolidation: Apollo's Jim Zelter warns that many PE funds have raised their final fund without realizing it, as scale advantages in deal flow, diversification, and workout resources increasingly favor large platforms.

The Wrap

Private credit's fundamental investment thesis remains intact with attractive yields and structural advantages, but the environment has shifted from rewarding broad exposure to demanding rigorous selectivity. Investors should prioritize manager selection based on rate cycle track records, scrutinize software sector exposure, consider geographic diversification into APAC and Europe, and understand the untested liquidity risks in semi liquid structures. As Goldman Sachs' Marc Nachmann plainly states, a credit cycle will come again, and that cycle will reveal which managers maintained discipline versus those who compromised under deployment pressure.