The private credit industry's fundraising machine is operating at full capacity, but the loan portfolios of its largest players are showing signs of strain that are becoming increasingly difficult to dismiss. A Wall Street Journal analysis published over the weekend revealed that default rates at funds managed by Ares Management, Blackstone, Blue Owl Capital, and Golub Capital have reached their highest levels since at least 2021.
The findings coincide with a Fitch Ratings report showing the private credit default rate climbed to a record 6% through the second quarter of 2026. Meanwhile, With Intelligence fundraising data indicates the industry is on pace to surpass its 2025 full-year total with five months still remaining in the year. This juxtaposition highlights the central tension now defining the $1 trillion-plus asset class: capital is flowing in at a historic clip, even as the borrowers underpinning that capital show increasing distress.
Defaults at the biggest names
The percentage of defaulted loans at Blue Owl Capital's flagship fund hit 2.8% in the second quarter, its highest in at least five years, according to the WSJ. Nonperforming loans at Ares, Blackstone's Secured Lending Fund, and Golub Capital's BDC also reached five-year highs, exceeding levels seen in 2023 when the Federal Reserve was aggressively hiking interest rates.
Executives have pushed back against the concerns. Blue Owl co-CEO Marc Lipschultz told analysts on the firm's most recent quarterly call that "across our direct lending strategy, credit health remains strong," and said the company had "seen no meaningful change in our watchlist compared with a year ago." Blue Owl, Blackstone, and KKR have each characterized investor concern as media-driven panic disconnected from actual fund performance.
The troubled loans are currently concentrated in healthcare and businesses exposed to oil-price volatility. The larger concern is whether stress spreads to software companies, which represent 20% or more of the loan books at many funds and are viewed as vulnerable to AI-driven disruption.
The retail squeeze
The stress in borrower quality is hitting retail investors with particular force. New data from With Intelligence shows that total '40 Act private credit assets—encompassing BDCs, interval funds, and tender offer funds marketed primarily to individual investors—stood at approximately $654 billion as of Q1 2026, with BDCs alone accounting for $561 billion. However, that growth has stalled. Between Q4 2025 and Q1 2026, overall '40 Act assets edged down amid a surge in redemption requests. Redemption requests from the top 10 non-traded BDCs averaged 13% of assets in Q1 2026 and 14% in Q2 2026, according to With Intelligence, forcing most managers to activate redemption gates and restrict investor withdrawals.
The redemption pressure reflects the same loan-quality concerns investors have been reading about. Research published in August 2026 by the Federal Reserve Bank of Boston found that the share of BDC loans structured as payments-in-kind—arrangements that allow borrowers to add unpaid interest to their principal balance rather than pay it in cash—rose from approximately 5.4% in Q1 2022 to 9.8% in Q1 2026, peaking near 9.85% in Q4 2025. José Fillat, co-author of the study, described the PIK usage trend as "a sign of stress," according to Axios.
Most BDC loans carry floating interest rates, meaning that with the Federal Reserve's benchmark rate currently near 4%, small and mid-sized borrowers are carrying substantially heavier debt loads than when rates were near zero. Those companies have also faced headwinds from tariffs, energy prices, and commodity cost pressures.
Institutional money keeps coming
Against all of that, the fundraising data from With Intelligence tells an almost contradictory story that helps explain why the industry's biggest players can maintain an upbeat public posture even as their loan books show strain. Private credit fundraising reached $119 billion in Q2 2026 alone, pushing H1 totals to $190 billion—a 53% increase over the first half of 2025 and already 80% of the full-year 2025 total of $240 billion, according to With Intelligence. Direct lending raised $73 billion in Q2 2026, bringing H1 2026 fundraising to nearly $100 billion and leaving the strategy just $6 billion short of its entire 2025 haul.
That capital is coming predominantly from institutional investors such as pension funds, endowments, and sovereign wealth funds, who are backing large, established managers. While non-traded BDC investors are requesting their money back, institutional limited partners are writing larger checks. Specialty finance—encompassing asset-backed lending and other strategies less exposed to floating-rate borrower stress—is attracting particular institutional interest. With Intelligence recorded more than $37 billion in specialty finance final closes year-to-date through Q2 2026.
Ares Pathfinder III, which closed in June 2026 with $8.5 billion in capital commitments, became the largest asset-backed finance fund ever raised, according to With Intelligence. The pipeline reflects where the industry is heading: specialty finance accounted for 23 of the new private credit funds in development as of Q2-end 2026, the largest share of any strategy. For advisors, the divergence between retail and institutional flows is a key dynamic to monitor, as redemption pressures in private credit funds continue to shape client conversations.
