Private Credit's Stress Test Will Redistribute Power, Not Destroy It

What's New

Howard Marks, Co-Founder and Co-Chairman of Oaktree Capital Management, Michael Arougheti, Co-Founder and CEO of Ares Management, and Amanda Lynam, Chief Credit Strategist in Goldman Sachs Research, argue that the current wave of private credit stress, including high-profile defaults, valuation concerns, and a surge in redemption requests, will reshape market share within the asset class rather than threaten its structural viability in a discussion on Goldman Sachs Exchanges. Non-traded BDC redemptions have exceeded typical quarterly allowances and software lending exposure has drawn outsized scrutiny. The implication: allocators who can distinguish structural risk from cyclical noise stand to gain as capital rotates from weaker vehicles to stronger ones.

Why It Matters

The dominant narrative frames private credit's current stress as evidence of systemic fragility in a $2 trillion market built during a decade of easy conditions. Marks, Arougheti, and Lynam push back, arguing that the redemption pressures are concentrated in non-traded BDCs representing less than 10% of the market, while the vast majority of institutional capital sits in locked-up drawdown structures unaffected by retail flows. The conventional wisdom that software exposure could trigger cascading defaults is challenged by Marks's arithmetic on loss absorption through the capital structure. Notably, all three speakers have direct financial stakes in private credit's continued health.

Big Picture Drivers

• Post-GFC structural shift: Banks lost capital in the global financial crisis and faced harsher regulation designed to reduce riskiness, creating a lending void that private credit filled. The asset class grew from essentially zero in its current form before 2011 to approximately $2 trillion today.

• Competition eroding lender advantage: Early private lenders could demand high interest rates and strong protections, but as success attracted capital, the surplus was arbitraged away. Marks describes this as a "gold rush" driven by roughly $20 billion in annual fees available on a $2 trillion lending base.

• Borrower universe expansion: Lynam notes private credit's addressable market has expanded since the pandemic to include borrowers who could access public debt markets but choose private credit for speed, certainty, and customization.

• Non-traded BDC design mechanics: The 5% quarterly NAV redemption limit was built to match the weighted average life of underlying loan portfolios, with 20 to 30% of portfolios held in liquid securities to meet redemptions without forcing private asset sales.

• Institutional versus retail structure divergence: Retail BDCs represent around 15% of traditional private credit AUM per PitchBook LCD estimates. Institutional capital remains in drawdown funds with fundamentally different liquidity dynamics.

By The Numbers

• $2 trillion — approximate size of the direct lending market today, up from near zero before 2011.

• Less than 10% — non-traded BDCs as a share of the total private credit market.

• $5 billion vs. $85 billion — maximum quarterly loan sales from non-traded BDCs to meet redemptions versus quarterly syndicated loan market trading volume.

• 7 to 8% — PIK income as a share of overall BDC income over the past several quarters, off its recent peaks.

• 2:1 — BDC leverage limit (debt to equity), with many operating well below it.

• 12.5% — Marks's illustrative portfolio loss if a quarter of investments are in software and each loses half its value, before leverage.

Key Trends to Watch

• Capital rotation within private credit: Arougheti expects slower growth in non-traded BDCs but offsetting acceleration into opportunistic credit, credit secondaries, and direct lending funds. The timeline for retail re-entry likely mirrors the real estate wealth channel recovery pattern from three to four years ago.

• Credit cycle completion as a clearing mechanism: Marks argues private credit hasn't yet been through a full credit cycle. Once investors experience both the easy-borrowing phase and the overreaction phase, lending standards and decision-making should improve, producing a healthier investment environment.

• Software exposure as a differentiation test: Marks frames double-digit software defaults not as a systemic risk but as a manager-selection test. Funds concentrated in software with weak due diligence will underperform, widening the return dispersion Arougheti expects.

• Fundamental indicators to monitor: Lynam flags realized losses tracking below historical averages through year-end 2025, non-accrual rates in a tight range, and leverage well below regulatory limits, all contingent on growth holding at trend pace or better.

Memorable Quotes

• "Every upsurge in financial activity brings heated competition, more participants, perhaps some risky behavior to get in on it." Marks on why the private credit boom followed the pattern of every prior gold rush.

• "There is no asset liability mismatch, there is no run on the bank in these funds." Arougheti dismissing the narrative that non-traded BDC redemptions could trigger systemic contagion.

• "Losing a quarter of your capital because the whole software industry lost five sixths of its value is not abysmal. It's just bad." Marks calibrating the realistic downside even under extreme software stress.

• "Direct lending is going to be okay. But it might take a cycle to get there." Marks quoting his Oaktree partner Bob O'Leary on the timeline for private credit's maturation.

The Wrap

Private credit's first real stress test is revealing something more consequential than default rates or redemption queues: it is exposing which structures were built for durability and which were sold on convenience. All three speakers see a retail channel that mispriced liquidity expectations, a software concentration that will punish undisciplined underwriters, and an institutional core that remains structurally insulated from both. Where they diverge is on tempo. Arougheti sees capital already finding new channels, with opportunistic credit and secondaries absorbing what non-traded BDCs lose. Marks wants the full credit cycle to play out, the overreaction phase where borrowing becomes too hard, before he'll trust the market's discipline. The thesis validates if return dispersion widens and capital consolidates toward better-structured managers without broader market contagion. It breaks if realized losses, still below historical averages through 2025, accelerate sharply under a growth slowdown, or if software defaults cascade beyond what senior secured positions can absorb. The next two to three quarters of loss data will determine which side of that line the market lands on.