Publicly traded private credit firms have dropped 25 to 40% year-to-date. That is a real number, and it has real consequences for anyone holding those shares. But here is what it is not: evidence that the $1.7 trillion private credit market is about to blow a hole in the financial system. The earnings data from underlying borrowers tells a different story than the stock tickers, and I trust the earnings.
The Number That Doesn't Fit the Panic
Fitch pegs the private credit default rate at 5.2% as of early 2026. That is elevated. It is not catastrophic. For context, the leveraged loan default rate peaked above 10% during the GFC and sat near 4% during the 2020 COVID shock. A 5.2% rate in a rising-rate environment with a sector-specific sell-off is consistent with a credit cycle turning, not a system breaking.
The borrowers themselves keep posting results that contradict the doomsday framing. Disclosures through March show double-digit revenue and EBITDA growth across private credit portfolios, with improving interest coverage ratios and expanding margins. If you are a lender sitting in senior secured debt on a company growing revenue 15% annually, the February software sell-off changed the equity story. It did not change your recovery math.
Goldman Sachs and JPMorgan both concluded this month that private credit poses limited systemic risk. Their reasoning is straightforward: investments are not concentrated in a single counterparty, fund leverage is modest, and the duration mismatch that defined the 2008 crisis simply does not exist here. Assets and liabilities are well matched. That structural fact matters more than a conference poll where 41% of European bankers named private credit their top worry. Bankers worry professionally. I want to see what they do with their balance sheets.
Where the Bears Have a Point, and Where They Don't
Ray Vega and others flag the 25 to 30% software concentration in some private credit portfolios as a systemic vulnerability. Fair. Concentration risk is real, and the funds most exposed to software refinancing will face genuine stress over the next 12 months. But concentration in a single sector is not the same as concentration in a single counterparty or a single instrument. Private credit portfolios typically hold hundreds of positions across subsectors. A software repricing creates dispersion among managers. It does not create contagion.
The 400 basis point increase in funding costs for high-beta borrowers is the sharpest pain point right now. For a mid-market software company carrying $50 million in debt, that translates to roughly $2 million in additional annual interest expense. Painful, yes. Terminal, no, especially for companies still growing revenue in the double digits. The borrowers most at risk are the ones that were already marginal: small, unprofitable, dependent on cheap refinancing. Good underwriters avoided them. Bad ones did not. That is where the losses will concentrate.
ING's framing is the most honest I have seen: "The system is not collapsing, but it is re-pricing risk." Exactly right. Redemption gates and fund withdrawal caps look alarming in headlines. In practice, they are liquidity management tools that prevent forced selling at distressed prices. They protect remaining investors. The retail outflows driving these gates are technical, not fundamental, and the higher yields they are creating will attract institutional capital within quarters.
US insurers allocating 10 to 25% of assets to private credit and regional banks holding 4 to 5% exposure are legitimate channels for stress transmission. I take that seriously. But the Office of Financial Research's $410 to $540 billion estimate of combined bank and nonbank lending exposure represents a fraction of the banking system's total assets. Spillover is possible. Systemic crisis requires a mechanism for cascading failure, and the structural features of private credit, locked-up capital, low leverage, senior positioning, work against exactly that.
The right response for investors is not to flee. It is to differentiate. The gap between top-quartile and bottom-quartile private credit managers will widen dramatically over the next 18 months. Funds with disciplined underwriting and diversified sector exposure will outperform. Funds that chased software deals at peak valuations with loose covenants will not. The 5.2% default rate is an average. Averages obscure the only question that matters: which side of the dispersion are you on.
