The arithmetic of the private credit market has entered a phase of violent contradiction. To observe the flow of capital in late 2025 and the opening weeks of 2026 is to witness two distinct realities operating simultaneously: a retreat governed by immediate fear of credit quality, and an advance driven by the sheer structural necessity of non-bank lending.
In the final months of 2025, investors withdrew $7 billion from some of the most prominent names on Wall Street. Yet, almost simultaneously, other managers closed flagship funds billions of dollars above their targets. This is not a market acting in unison; it is a market in fracture. The trouble at auto-parts maker First Brands Group last September served as the initial tremor, a flashpoint that critics seized upon as proof that aggressive debt structures built quietly during a decade of easy financing were finally buckling. When Tricolor subsequently faced bankruptcy, the anxiety crystallized.
JPMorgan Chase CEO Jamie Dimon famously warned that risks were "hiding in plain sight," suggesting that "cockroaches" would inevitably emerge as economic conditions deteriorated. But the data suggests that while some investors are fleeing the kitchen at the first sighting of pests, institutional allocators are buying the building. The narrative of a bursting bubble is competing with a narrative of structural permanence, creating a complex environment where redemption requests and record-breaking fund closes sit side-by-side.
The withdrawal of $7 billion is not a rounding error; it is a signal of deteriorating sentiment among a specific class of investors. According to filings and industry executives, funds managed by heavyweights including Ares Management, Barings, Blackstone, HPS Investment Partners, Blue Owl, Cliffwater, and Oaktree all faced an uptick in redemption requests as 2025 concluded.
"Redemptions are up across the board," a senior private credit executive noted, characterizing the shift. The mechanism driving this exit is twofold: credit anxiety and interest rate mechanics.
First, the fear is palpable. Philip Hasbrouck, co-head of Cliffwater’s asset management business, observed that "there is a lot of fear in the air," noting that time will tell if such fears are well-founded. The bankruptcies of First Brands and Tricolor acted as catalysts. Even though these companies largely financed themselves through loans and asset-backed securities organized by banks, the reputational contagion spread to private credit funds. The asset class, once viewed as an impervious yield generator, was suddenly tarnished by the realization that default is not merely a theoretical risk.
Second, the monetary environment has shifted. As the Federal Reserve signaled intentions to lower interest rates, the mathematical allure of floating-rate debt began to dim. Major private credit funds, which invest heavily in these floating-rate instruments, moved to cut dividends. For yield-sensitive investors, this reduction in returns, combined with the "cockroach" theory of hidden defaults, provided sufficient impetus to pull capital.
However, to view the $7 billion outflow as the defining metric of the market would be a mistake. While capital fled one side of the ledger, it poured into the other with equal or greater velocity. The appetite among global institutional investors remains not just intact, but aggressive.
In December, TPG closed its third flagship Credit Solutions fund with more than $6 billion in commitments. This figure is significant not only because it smashed the firm’s $4.5 billion target, but because it represents a fund double the size of its predecessor. Similarly, Neuberger Berman announced in November the final close of its fifth flagship private debt fund at $7.3 billion, also exceeding original targets. KKR followed suit just last week, completing a $2.5 billion fundraise for its Asia Credit Opportunities Fund II.
Why are these institutions committing billions while others withdraw? The answer lies in a structural reassessment of the banking sector.
Despite Jamie Dimon’s warnings about "cockroaches," his own institution, JPMorgan, appears to have recalibrated its view on the necessity of the asset class. In its Alternative Investments Outlook 2026, the bank noted that demand is underpinned by persistent financing needs among middle-market companies, infrastructure developers, and asset-backed borrowers.
The retreat of traditional banks is the primary driver of this capital permanence. Regulatory reforms enacted following the 2008 Global Financial Crisis specifically higher capital requirements and stricter risk-weighting rules have made it prohibitively expensive for banks to hold risky corporate loans. This has forced a secular retreat from leveraged and bespoke financing. Private credit funds have stepped into this void, evolving from a niche alternative into the primary providers of capital to middle-market companies. Goldman Sachs now describes private credit as a multi-trillion-dollar market that has become a "core allocation" for pension funds, insurers, and endowments. These allocators view the defaults of late 2025 as "issuer-specific rather than systemic," arguing that the demand for yield continues to outpace supply.
Between the panic of the withdrawals and the confidence of the new raises lies the fundamental reality of the borrowers. Here, the data is less ambiguous and more concerning.
Goldman Sachs has flagged a critical deterioration in borrower health. Their data indicates that approximately 15% of borrowers are no longer generating enough cash to fully service their interest payments. This is a stark metric of distress. Many other companies are operating with "little margin for error."
The root cause is the prolonged period of high interest rates, which have filtered through balance sheets that were constructed during the ultra-low rate era of 2010 to 2021. While rate cuts are on the horizon, Goldman Sachs analysts warn that they will only "modestly ease the pressure" rather than cure the underlying weakness.
Morningstar echoes this sentiment, warning of worsening credit profiles in 2026 across both high- and low-quality borrowers. Bridgewater founder Ray Dalio has also cautioned that higher rates are squeezing leveraged private assets, contributing to mounting stress. The "cockroach" theory, therefore, is not without merit; the 15% of borrowers unable to cover interest payments represents a segment of the market where financial engineering can no longer mask operational insufficiency.
The Asiatic Divergence
Perhaps the most compelling insight from the current market data is the geographic asymmetry of risk. The leverage and covenant erosion that currently plague the U.S. and European markets are not uniformly distributed globally.
Asia is emerging as a distinct counter-narrative. Granite Asia recently announced the first close of its pan-Asia private credit strategy, raising over $350 million with backing from sovereign heavyweights like Temasek, Khazanah Nasional, and the Indonesia Investment Authority.
The logic driving this capital is that Asia is fundamentally less saturated. Ming Eng, managing director at Granite Asia, argues that the region does not suffer from the same "leverage or covenant erosion that people are worried about in the U.S."
"Asia is at a very different stage of development," Eng noted. Unlike the crowded Western markets, where intense competition drives looser deal structures, the Asian market remains nascent. Borrowers are often founder-led companies or family-owned businesses that have historically relied on banks or equity financing. As a result, the deals struck in this region tend to be more conservative.
"Most of what we see in Asia is still very conservative," Eng said. "There’s less leverage, stronger covenants, and often a real operating story behind the capital, not financial engineering."
The Liability-Driven Floor
Underpinning the resilience of private credit fundraising despite the outflows is a severe demographic and fiscal reality in Europe that demands yield at any cost.
The rising number of older people across Europe is straining national budgets, forcing pension funds to chase the returns that private credit offers. Across the EU, 47% of social protection expenditure is now spent on old age and survivors' benefits. Italy leads with pension costs at just over 15% of GDP, while France and Greece spend over 14%. In Germany, the situation is even more acute, with one-third of all federal tax revenue now allocated to plugging holes in the state pension system.
This macroeconomic pressure creates a floor for the asset class. As Antoine Bozio of the École des Hautes Études en Sciences Sociales points out, the conflict between funding defense, energy transitions, and pensions is acute. For the allocators managing these deficits, the yield premium of private credit is not a luxury; it is a mathematical requirement to meet future liabilities.
Conclusion
The private credit market of 2026 is defined by a clash of timelines. The short-term timeline is dominated by the $7 billion withdrawal, the bankruptcies of First Brands and Tricolor, and the immediate pain of the 15% of borrowers unable to service debt. This is the timeline where the "cockroaches" live.
The long-term timeline, however, is defined by the permanent retreat of regulated banks and the massive capital raises by TPG, Neuberger Berman, and KKR. It is driven by the inexorable needs of pension systems that cannot afford to exit the asset class. The "bubble" is not bursting so much as it is hardening into a permanent, if more perilous, layer of the global financial architecture. The smart money is not leaving; it is merely becoming more selective, looking toward markets like Asia where the covenants still hold, and accepting that in the U.S., the era of zero-default lending has officially closed.
.svg)