Fitch Ratings tracked 302 middle-market firms through 2025 and found a 9.2% default rate, up from 8.1% the year before. That number has not led most market commentary. Instead, investors are arguing about whether private credit is the next financial crisis or a misunderstood safe haven. Both framings miss the point.
The number that actually matters is $25 million. That is the EBITDA threshold below which defaults are concentrating. Firms above $50 million EBITDA are holding. Firms below $25 million are not. Private credit is not a monolith collapsing; it is a market sorting itself by borrower quality, and investors who own funds weighted toward small leveraged borrowers are sitting in the wrong seat.
What the Liquidity Pressure Is Actually Telling You
Early 2026 saw redemption activity in private credit interval funds surge enough that managers raised quarterly repurchase limits to absorb it. Critics called this a bank run. That framing is wrong, but not because the stress is fake. It is wrong because a bank run is driven by fear of insolvency. What happened here is closer to a performance review: investors locked into illiquid structures realized yields had compressed from 11% to 8-9% over 2025 as the Fed cut rates and capital poured in, and they are now asking whether the premium over public credit still justifies the illiquidity. That is a rational reallocation, not a panic.
The software exposure is a separate, more legitimate worry. Roughly 20% of private credit loans sit in software companies, and AI disruption is softening valuations in that sector. When the collateral gets murky, PIK interest starts appearing more often, which means borrowers are rolling interest into principal rather than paying cash. PIK is not always a red flag, but a rising PIK share across a portfolio is a leading indicator that lenders are extending credit to avoid recognizing losses. Investors should be asking their managers what percentage of the portfolio is PIK-accruing. If the answer is vague, that is the answer.
The Opacity Problem Is Real, and Regulators Know It
The Bank of England launched system-wide stress tests on private credit in March 2026. Major US managers joined voluntarily. US SEC Chair Paul Atkins called recent disruptions isolated. Both things can be true: no systemic crisis today, and insufficient transparency to catch one forming. Morgan Stanley's Jim Caron is right that this is not 2008, because layered leverage on derivatives is not present at scale. But the $2 trillion that has flowed into private credit since 2008 has brought retail money into structures that retail investors have never held through a real credit cycle. That is new, and it carries its own risks.
The fair point to opponents: Morgan Stanley projects 8% defaults for 2026, and JPMorgan's Stephen Parker says systemic risk is low. They are probably right about the system. They are less useful to an individual investor deciding whether to stay in a specific fund.
If you are in a well-diversified private credit fund with borrowers above $50 million EBITDA, limited software concentration, and a manager with clean liquidity history through 2025's redemption surge, the 8-9% yield still beats investment-grade public credit meaningfully. Hold it. If your fund is small-borrower heavy, software-concentrated, or PIK-opaque, the risk-adjusted case has deteriorated. Yields that started at 11% and landed at 8-9% while defaults climbed to 9.2% is not a favorable progression. The math changed; the pitch did not.
The 9.2% default rate is not a crisis. It is a screening mechanism. Use it.
