Private Credit and the Test of Repayment

Private credit is lending outside traditional bank channels, often through investment funds. Because many of these loans rarely trade, their reported values depend on estimates. Those estimates matter. But the question that interests me most is what happens when someone needs the money back.

The September 2026 evidence gives that question more urgency. Several large funds continue to face substantial withdrawal requests. Borrower defaults and portfolio markdowns warrant attention. Revised insurance disclosures have also brought previously less-visible concentrations into view.

This builds on our earlier analysis of private-credit liquidity. The issue is not whether every private loan is impaired, or whether a market-wide crisis is inevitable. It is whether reported values hold up when borrowers repay, investors seek withdrawals, or assets must be sold.

BCRED’s first-quarter shareholder letter reported $1.9 billion of gross investor inflows and $3.2 billion of repurchases. Blackstone and senior leaders also invested through a feeder fund to help the fund meet requests. Those are first-quarter flows, not evidence that every underlying loan was distressed.

In its September 3 shareholder notice, BCRED reported third-quarter withdrawal requests representing approximately 10% of shares outstanding, against planned repurchases of 5%. That notice preceded quarter-end: requested withdrawals and planned payments should not be described as completed payouts.

Cliffwater faced a similar imbalance. PitchBook LCD reported on September 9 that investors requested repurchases of 16% of its Corporate Lending Fund’s shares, down from 17% in the second quarter, while the fund planned to repurchase 5%. The same report included an important qualification: according to Cliffwater, investors requesting repurchases each quarter since the first quarter had received 78% of their capital to date.

Persistent withdrawal pressure deserves attention. It does not, by itself, establish insolvency or tell us how much lenders will ultimately recover. Fund liquidity and borrower credit quality are related questions, but they are not interchangeable.

According to Reuters’ March 6 report on Fitch’s findings, the default rate in Fitch’s monitored group of 302 private-credit borrowers reached 9.2% in 2025, up from 8.1% in 2024. The measure includes distressed debt exchanges as well as bankruptcies. It is a borrower-default measure for that group, not a statement that investors lost 9.2% of their money.

Reuters’ September 2 review of 44 business development companies found that the gap between portfolio cost and estimated fair value increased from $720 million at December 31, 2025, to $2.31 billion at June 30, 2026. The portfolios included debt and equity investments. The June gap was about 2.4% of cost: deterioration worth examining, but not evidence that most investments were impaired.

In a smaller subset of ten BDCs with comparable filings, Reuters found that non-accrual investments rose from 2.5% to 3.4% of portfolio cost over those six months. That is a 0.9-percentage-point increase, and it should not be presented as a finding covering all 44 companies. Reuters also noted signs of stabilization in overall second-quarter valuations after broader first-quarter markdowns.

These distinctions matter. An unrealized markdown is not a loss from a completed sale. Equally, a modest average decline can conceal much greater trouble at particular borrowers. The useful next question is which assets are affected and what recovery is realistic.

Insurers can hold investments against obligations that stretch over many years. That can give them time to wait for repayment. It does not remove the need to understand who owes the money, how investments are connected, and whether borrowers can pay.

Delaware Life illustrates why accurate classification matters. Reuters reported on August 18 that the insurer had restated financial statements and reclassified a substantial volume of private-credit investments as affiliated or related-party assets. TWG Global announced an agreement to exchange up to $6.5 billion of Delaware Life’s related-party investments for an equivalent amount of independent assets.

TWG said its Group 1001 insurance companies’ capital and liquidity remained strong. That response belongs alongside the disclosure concerns. An announced exchange is not confirmation that the exchange has been completed, and reported investigations are not findings of wrongdoing.

My concern is the visibility of risk: whether investors and regulators can identify concentrations and conflicts before a repayment problem forces the issue. Better disclosure helps make that judgment possible; it does not establish the amount of any eventual loss.

Treasury’s May 7 meeting with state insurance commissioners and the National Association of Insurance Commissioners addressed private credit, private ratings, and offshore reinsurance. The NAIC’s private-credit overview describes changes to insurer financial reporting effective at year-end 2026, intended to improve visibility into these holdings.

The European Central Bank’s May 2026 analysis offers a useful boundary on the argument. It concluded that private credit alone was unlikely to threaten euro-area financial stability at present, while highlighting incomplete data and potential spillovers. In its hypothetical stress exercise, the largest modeled impact came from wider market revaluations, not direct private-credit losses alone.

A stress scenario is not a forecast. The practical value of this work is in asking who holds the exposures, where risks overlap, and which institutions would absorb losses under adverse conditions.

My work brings me to the point where these questions become concrete. When a company fails, someone must examine the assets, establish the claims, and find a buyer. The balance sheet begins that process; it does not determine the bid.

That is why I focus on the route from recorded value to recoverable cash. Complicated ownership can slow a sale, increase costs, and reduce what is left for creditors. A credible assessment needs to address those frictions, not just the last valuation.

For a company under pressure, turnaround advisory starts with understanding the business and its ability to generate cash. Where a sale or wind-down is being considered, Article 9 sales and assignments for the benefit of creditors are among the processes worth understanding. They are not interchangeable remedies or automatic recommendations; the appropriate approach depends on the facts. Our comparison of ABCs, Chapter 7, and Chapter 11 explains some of those distinctions.

• What cash can the borrower actually produce to service and repay the debt?
• Who owns the assets, and which claims must be resolved before a sale?
• What would a buyer pay, and how long would a transaction take?
• After costs and competing claims, what could creditors receive?

Payment-in-kind interest, or PIK, adds interest to the debt instead of paying it in cash. Sometimes that arrangement was part of the original loan. Sometimes it is a concession to a borrower that needs relief. Treating both situations as identical obscures an important difference.

BCRED reported that PIK fell from 7.8% to 7.0% of investment income in the first quarter, with the vast majority structured at underwriting. That is a useful counterpoint to a uniformly negative account of the market. The question is not whether PIK exists, but what it says about a particular borrower’s capacity to pay.

As in our discussion of productive borrowing and deferred decisions, more time is useful when it supports a credible outcome. It should not be confused with evidence that repayment has occurred.

I would be reassured by sustained repayments, fewer distressed restructurings, easing withdrawal pressure, and repeated sales close to reported values. There is positive evidence to weigh: BCRED’s September notice said loan repayments and inflows had outpaced repurchases, while Cliffwater reported the capital returned to investors who had requested liquidity over successive quarters.

No single transaction settles the condition of an entire market. But actual payments and completed sales are evidence, and any assessment should change when that evidence changes.

There is also a leadership obligation that begins before a legal violation: disclose conflicts early, recognize deteriorating values promptly, and give the people whose money is at risk a clear account of the numbers. The test is not simply whether a structure complies with a narrow reading of a rule. It is whether the decisions protect the people relying on it.

I cannot predict how far losses will spread. The combination of withdrawal pressure, borrower difficulty, and clearer disclosures does justify closer attention. For boards and lenders, the next step is to examine the business and the recovery path in front of them. If that work would benefit from an independent restructuring perspective, speak with our team.