It’s always something

  By Guest Blogger Doug Rowat

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You have to hand it to the financial crisis; it’s had lasting impact.

Seventeen years later and it still resonates so much with investors that every year the media eagerly tries to identify the spark that will ignite the next one.

Enter private credit.

Naturally, the three biggest stories over the past year have been tariffs, the Iran war and AI. But running a close fourth is private credit, and the share-price collapses of a number of key private-credit companies have generated an enormous amount of media attention.

First, what is private credit? Private credit generally refers to non-bank lenders who make direct loans to small- to medium-sized private companies. The types of lenders vary, but increasingly they’re institutional asset managers. However, the key point is that they’re not traditional banks, which are subject to more lending restrictions following, ironically, the financial crisis. The US private credit market has grown rapidly with Bloomberg pegging it at US$1.8 trillion, up more than three-fold over the past decade.

For a long time, there was little issue with either the lenders or the companies that were doing the borrowing, but over the past year problems have surfaced with alternative asset manager Blue Owl Capital becoming a poster child for all the problems within private credit. The rise of AI has expanded defaults, particularly with software companies, an area where Blue Owl has substantial exposure. Last year, as the defaults mounted, Blue Owl initially allowed fund redemptions, but the redemptions became so excessive that its stock price cratered—now down more than 40% over the past 12 months and more than 60% from its January highs.

So, the question every analyst is now asking: will the strain on private credit result in the next financial crisis? Maybe, but probably not.

First, financial crises generally occur when there’s an abrupt reversal of risk expectation. In other words, panic occurs when something that’s presented as safe unexpectedly becomes risky. Mortgage-backed securities being triple-A rated prior to 2008 being an excellent example. However, private credit is more transparent: investors have known from the outset, similar to any other high-yield investment, that private credit represents riskier debt.

Morningstar further adds, after examining more than 1,200 private-equity debt funds, that the leverage seen during the financial crisis simply doesn’t exist in today’s private credit market. Private credit lending is much better supported by more meaningful equity cushions and therefore the loans are less risky. Ninja loans made famous during the financial crisis simply don’t exist in private credit. Further, because of the way that most of these funds are structured, cash flows for the borrowing companies have to arrive before obligations come due, which ultimately limits defaults.

Few analysts doubt that defaults are likely to rise this year, but there’s no clear consensus on how much. And only the improbable, worst-case scenarios make the news. But what is clear is that historical private credit default rates have been in line or below other speculative-grade debt:

1996-2026: 12-month trailing issuer-weighted speculative-grade default rates (dotted line indicates selective defaults*)

Source: Financial Times, utilizing Moody’s and S&P data. *Selective defaults refer to restructured debt designed to avoid formal bankruptcy, sometimes referred to as ‘shadow defaults’ and is seen as providing a more complete picture of private credit stress.

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JP Morgan further highlights that high-risk credit overall in the US has hovered at around 20% of GDP for a decade. While private credit has taken its share from other risky credit types because of its growth, there hasn’t actually been an explosion in overall high-risk debt. JP Morgan also notes that the investor base in private credit is still primarily institutional (about 80%) reducing the risk of rapid outflows.

Many of these lenders are also now capping redemptions at 5–7%, avoiding Blue Owl’s early missteps. This certainly sucks for investors wanting liquidity, but more broadly speaking, it’s providing stability, which explains why many private-credit stocks have rallied strongly in recent weeks.

The media’s constantly searching for a new financial crisis knowing it will generate readership as the OG 2008–2009 financial crisis still haunts investors. However, these constantly emerging new ‘dangers’ usually amount to nothing.

A perfect recent example was the 2023 US regional bank scare. At the time, the media positioned the collapse of California-based Silicon Valley Bank, First Republic Bank and others as the start of another financial crisis. It wasn’t of course. And if you’d exited the S&P 500 back in March 2023 when the regional bank problems were grabbing major headlines, you would have sacrificed more than 85% upside since. The US regional bank market is also much larger than the private credit market.

But perhaps the clearest sign yet that private credit won’t result in contagion is that the S&P 500 Banking Industry Index is actually 29% higher over the past year. Private credit stresses are certainly not a new issue for investors, it’s been a concern for more than a year. But if contagion was seen as a meaningful risk more downside would likely be priced into the broader banking sector.

Private credit challenges have obviously made it difficult for a select group of institutional debt investors and individual stock pickers, and these problems also highlight a new and highly specific downside risk of rapid AI growth, but not every headline equates to a financial crisis.

To paraphrase Warren Buffett, when the private-credit tide goes out, it’ll likely reveal more Speedos than naked swimmers.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/05/09/its-always-something/