Middle East conflict, US private credit defaults hit record highs... private credit fund redemption waves continue, with giants collectively honoring only about 70% of withdrawals. Has Wall Street caught a whiff of the "2008 crisis"?

As a core sector of the $2 trillion alternative assets market, the US private credit market has been experiencing a continuous wave of redemptions since the first quarter of 2026.

Industry insiders still disagree on the severity of this crisis, with much of the current Wall Street debate focusing on whether investors are facing a crisis similar to 2008.

Some industry professionals have sensed a hint of the 2008 crisis. Morgan Stanley strategists emphasize that the current risks in private credit are limited to the industry level and do not constitute systemic risk, with limited spillover effects.

According to reports, the wave of redemptions in US private credit continues to intensify. Recently, Morgan Stanley issued a warning: as AI technology continues to develop and impact the software industry, the private credit market is preparing for a new round of pressure, with default rates expected to rise to around 8%.

Led by analyst Joyce Jiang, the team states that although AI has not yet caused a substantial impact on private credit, potential risks are rapidly accumulating, especially related to software industry loans. High leverage and weakening cash flow coverage could push default rates to recent highs.

Notably, just a few days ago, Morgan Stanley and Cliffwater LLC both imposed redemption limits on their multi-billion-dollar debt funds due to investor redemption requests exceeding normal quarterly limits.

According to the Financial Times, in the first quarter of this year, some large private credit funds faced over $10 billion in redemption requests, involving firms like Blackstone, BlackRock, Cliffwater, Morgan Stanley, and Monroe Capital.

Industry experts analyze that leading firms like Blackstone and Blue Owl have previously adjusted redemption rules and sold assets in response to redemption pressures. Coupled with Fitch Ratings’ disclosure that US private credit default rates have hit a high since August 2024, along with external factors such as Middle East conflicts and economic slowdown expectations, market risk aversion toward the industry continues to rise. Liquidity mismatches and incomplete disclosures accumulated during industry development are also being exposed.

AI Reshapes Software Industry Ecosystem — Private Credit Faces Default Pressure

Recently, Morgan Stanley explicitly pointed out in a report that as AI-driven industry transformation reshapes the software sector, the private credit market is preparing for a new wave of pressure. Direct loan default rates are expected to rise to about 8%, approaching the peak levels seen during the COVID-19 pandemic.

The report states that the credit fundamentals of loans in the software industry are among the most fragile across sectors, characterized by high leverage and low debt service coverage ratios. Joyce Jiang’s team notes that software loans have the highest leverage and lowest interest coverage among major industries, with cash flow coverage weakening and debt repayment capacity under significant pressure.

At this moment, as the warning is issued, global credit markets are struggling to cope with the impact of AI on corporate business models, especially in the software sector. Historically, the software industry has been favored by private credit investors due to its stable income and high profit margins.

Over the past decade, alternative asset managers have significantly increased their exposure to software companies. Morgan Stanley data shows that the sector currently accounts for about 26% of non-listed Business Development Company (BDC) portfolios. In CLOs (Collateralized Loan Obligations), exposure to the software industry is also substantial at around 19%, with many loans maturing soon.

According to PitchBook, a global financial tracking firm, direct loans in the software sector show a “front-loaded” maturity profile: 11% of loans will mature in 2027, with the proportion rising to 20% in 2028. If market liquidity tightens and lenders’ risk appetite declines, refinancing costs for software companies will increase significantly, and the difficulty of debt extension will directly raise default risks.

Under this risk warning, market liquidity pressures have already emerged. Just last week, Morgan Stanley and Cliffwater LLC both imposed redemption limits on their multi-billion-dollar private debt funds, exemplifying the tense liquidity situation. Both firms stated that the core reason for the restrictions was that investor redemption requests far exceeded normal quarterly limits, making it difficult for funds to meet all redemption demands without impacting asset prices.

Hundreds of Millions in Redemptions Sweep Asset Managers

Market analysts assess risk boundaries

The redemption restrictions by Morgan Stanley and Cliffwater are not isolated cases.

According to the Financial Times, in Q1 2026, leading firms like Blackstone, BlackRock, and Morgan Stanley received a total of $10.1 billion in redemption requests, with only about 70% being fulfilled; the rest had to be deferred.

For example, BlackRock’s $26 billion HPS corporate loan fund faced a 9.3% redemption request but only executed a 5% quarterly redemption limit; Blackstone’s flagship private credit fund, with $82 billion AUM, saw redemption requests reach 7.9% in a single quarter, a new high.

The redemption pressures have also affected the capital markets, causing related stocks to decline collectively. Since March 16, Blue Owl Capital’s stock has fallen 16.97%, with a year-to-date decline exceeding 40%. Ares Management also dropped over 10% in March. On March 6 alone, BlackRock’s stock plunged 7.17%, while Blue Owl, KKR, and Ares Management declined 5.09%, 4.46%, and 6.01%, respectively.

Notably, on March 11, KKR publicly stated that direct loans account for 5% of its assets under management. The company’s recent poor performance is mainly due to legacy investments and non-first lien investments. “Core operational metrics have not experienced substantial slowdown,” said CFO Robert Luin. Market performance in the past two days suggests that KKR’s stock has shown signs of stabilization and recovery.

Within the industry, there remains debate over the severity of this crisis, with much of Wall Street’s current discussion centered on whether investors are facing a crisis similar to 2008. Some industry insiders have already sensed a hint of the 2008 crisis.

In response to market panic, multiple institutions have also assessed risk boundaries. Morgan Stanley strategists emphasize that current risks in private credit are limited to the industry level and do not pose systemic threats, with limited spillover effects. The report states that the liquidity restriction mechanisms in private credit effectively block risk transmission, and banks’ exposure to this sector is defensive, unlikely to trigger a repeat of the 2008 subprime mortgage crisis.

Huatai Securities also points out that private credit is currently in a phase of industry cleanup, with short-term pressures expected to persist. However, under a baseline scenario of a soft landing for the US economy, systemic spillover risks remain manageable, more akin to a “storm in a teacup” (i.e., localized industry risk).

Some market participants warn that the disruptive impact of AI on the software industry is long-term and uncertain, and the restructuring of revenue models will continue to affect credit quality. Additionally, the increasing proportion of retail investors introduces liquidity vulnerabilities, which could further amplify market volatility. The rapid growth of private credit over the past decade may be coming to an end.

As of now, redemption restrictions remain in place. Over the next two weeks, as firms like Ares Management, Apollo Global, Blue Owl, Oaktree, and Goldman Sachs complete their assessments, redemption volumes are expected to rise further, and liquidity challenges in the private credit market are far from over.

Reporter | Li Lei

Editors | He Xiaotao, Xiao Ruidong, Yi Qijiang

Proofreader | Duan Lian

Cover image source: Visual China

| Daily Economic News nbdnews Original Article |

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