The private credit boom was built on a simple promise: steady, uncorrelated returns with almost no losses. That promise is now being tested, and the industry cannot agree on how badly it is failing. In recent months, a wave of competing data points has turned what should be a straightforward question — how many private credit borrowers are defaulting? — into one of the most contested debates in finance.
The stakes are enormous. Private credit has swelled past $2 trillion in assets, funded in large part by insurers, pension funds and retail investors chasing yield in a market that has never endured a full economic cycle. As interest rates have stayed higher for longer, the cracks are showing — but the depth of the damage depends entirely on which scorekeeper you ask.
A Market Divided on the Numbers
The divergence is stark. Proskauer reported that the private credit default rate actually fell to 2.5% in the second quarter, with the software sector — long viewed as the market's biggest concentration risk — holding stable. Meanwhile, Morningstar DBRS concluded that defaults are accelerating, driven largely by a surge in "distressed exchanges," a maneuver in which lenders extend maturities or swap debt for equity to avoid formally declaring a default. PitchBook, cited by The Wall Street Journal, warned that headline default rates may be downplaying the true level of risk.
Bloomberg's Kat Hidalgo captured the confusion bluntly: default rates "vary widely depending on who's counting, making the true level of distress tough to gauge." The discrepancy stems from methodology as much as economics. Some firms count only missed payments; others include restructurings, payment-in-kind (PIK) toggle exercises, and out-of-court liability management transactions. In a market of privately negotiated loans with no public price discovery, those definitions can swing default rates by hundreds of basis points.
"There is a disconnect between what's happening in the underlying loan market and the ratings upgrades we're seeing in private credit CLOs." — Jeffrey Gundlach, DoubleLine Capital
The 'Zero-Loss Fantasy' Unravels
Gundlach's warning about inflated CLO ratings echoes a broader complaint: that the private credit ecosystem's own rating and valuation machinery is too forgiving. CNBC reported that private credit defaults have hit record highs as interest rates soared, and separately that the asset class's long-touted "zero-loss fantasy" is coming to an end as defaults and fund exits rise.
One revealing indicator is the widening discount on business development companies (BDCs), the publicly traded vehicles that offer the clearest window into private credit performance. Widening BDC discounts — shares trading well below net asset value — suggest public investors believe the marks on BDC loan books are too optimistic. Morningstar analysts argued that investors are simply "not getting paid enough" for downgrade and default risk at current spreads.
The forward-looking picture is darker still. Partners Group warned, in comments reported by the Financial Times and Reuters, that private credit default rates could double over the next few years. Morningstar has modeled how the broader economy would weather defaults rising to levels seen during the global financial crisis — a scenario that, while not the base case, is no longer treated as unthinkable.
Wall Street Builds the Short Case
Markets are already hedging. Reuters reported that Wall Street has created a new credit-default swap index designed specifically to let investors bet against private credit — a landmark moment for an asset class that has historically been nearly impossible to short. The instrument gives skeptics a voice, and gives the market its first real-time barometer of sentiment on private lenders' creditworthiness.
Not everyone is convinced the alarm bells are warranted. InvestmentNews made the case to financial advisors that a "default" in private credit does not automatically mean a loss for lenders: recovery rates on secured, covenant-protected loans have historically been high, and many restructurings preserve principal. For advisors, the practical takeaway is to scrutinize fund-level leverage, PIK income as a share of portfolio yield, and sector concentration — particularly software and healthcare — rather than headline default statistics.
Regulators and Political Fallout
Washington is paying attention. SEC Chairman Paul Atkins said the agency is monitoring fraud risks in private credit as defaults rise — a notable signal given the commission's generally deregulatory posture. Forbes argued that regulators should be alarmed by the combined debt levels of private equity and private credit, warning that the two are so intertwined that stress in one quickly becomes stress in the other.
The political dimension is hard to ignore. The New York Times framed private credit wobbles as potentially "perilous" for President Trump, whose administration has leaned on private markets to finance infrastructure, data centers and AI buildouts while rolling back capital-markets rules. A wave of visible defaults at portfolio companies could collide with that agenda, turning a niche credit story into a mainstream political liability.
What Comes Next
- Watch the definitions. Whether the industry coalesces around a single default metric will determine how much confidence investors retain.
- Watch BDC pricing. Persistent double-digit discounts to NAV would signal that public markets reject private marks.
- Watch the CDS index. Trading volume and spreads will reveal how aggressively institutions are positioning for trouble.
- Watch PIK income. A rising share of payment-in-kind interest is often an early warning that borrowers cannot service cash obligations.
What remains genuinely unknown, as WealthManagement.com put it, is troubling: no one has data on how private credit behaves in a severe downturn, because it has never experienced one. The market is now discovering whether its resilience is real — or merely a function of who is doing the counting.
