Mounting strains in the $1.8 trillion private credit market are forcing a reckoning among investors, as redemption pressures, loan quality concerns, and structural risks expose the limits of an asset class long marketed as a steady source of yield, Bloomberg reports.

And major funds that invest in private credit have even begun to block or limit redemptions by investors.

The redemption crisis began in the fourth quarter of 2025, when Blue Owl allowed investors to withdraw more than 15% of net assets from a technology-focused fund.

Soon, other major players including Apollo, Ares, Blackstone, JPMorgan, Cliffwater and BlackRock all grappling with how to handle rising redemption demands.

“The big lesson of all of this is that, from an investor standpoint, this is a little bit of a wake-up moment,” said Lotfi Karoui, a multi-asset credit strategist at Pimco.

“People will think a little more carefully” about liquidity risk and whether they are being paid enough to take it,” Karoui said.

Several high-profile blowups and growing redemption requests have intensified scrutiny of private credit funds, particularly their exposure to software companies vulnerable to disruption from artificial intelligence, alongside the impact of tighter monetary policy and what some see as sloppy loan underwriting.

At the center of the liquidity crisis is a growing wave of funds restricting or managing investor withdrawals.

BlackRock recently capped withdrawals from its $26 billion HPS Corporate Lending Fund at 5% after investors sought nearly double that amount, marking a pivotal moment for the industry.

Cliffwater has faced pressure in its $33 billion flagship fund, while Blackstone allowed a record 7.9% of shares to be redeemed from its BCRED vehicle.

Ares has also dealt with elevated withdrawal requests, and JPMorgan has restricted some lending to private credit funds after marking down loans.

The dilemma facing firms is stark: block redemptions and risk alarming investors, or meet them and potentially undermine long-term returns.

ILLIQUID BY NATURE

“You cannot create liquidity from an illiquid asset class,” said John Cocke, deputy chief investment officer of credit at Corbin Capital Partners, warning that failing to enforce limits could create “a first-mover advantage for early redeemers.”

Others defend the restrictions as necessary.

“What HPS, BlackRock did is exactly the right decision,” said Apollo’s John Zito, adding that such products are “designed to protect redeeming and remaining investors.”

Karoui warned that the risks extend beyond individual funds, highlighting how interconnected the system has become.

Banks and alternative asset managers are now far more linked than a decade ago, reflected in a surge in bank lending — including undrawn commitments — to non-depository financial institutions to about $1.9 trillion from just over $300 billion in 2015.

In a stress scenario, that could amplify liquidity pressures across the financial system.

The tensions are emerging just as private credit firms push deeper into retail markets — and toward a major new frontier: retirement savings.

Following an executive order signed last year, private credit and other alternative assets are moving closer to being offered within 401(k) plans, potentially opening the door to trillions of dollars in individual retirement assets.

Guidance from the Labor Department is expected to further pave the way.

That expansion is raising fresh concerns about whether illiquid strategies are appropriate for everyday investors. Critics warn that redemption limits — often marketed as features — can become flashpoints in periods of stress.

“Semi-liquid funds were designed and marketed as products offering limited liquidity, especially during times of stress,” analysts at Evercore ISI wrote, adding that investors may need to be “retrained” on the realities of private assets.

At the same time, rising defaults and credit stress are adding urgency.

DEFAULTS RISE TO 5.8%

US private credit defaults have climbed to 5.8%, and some analysts warn they could go significantly higher in a worst-case scenario tied to AI disruption in software borrowers.

Despite the turbulence, Karoui said opportunities remain — particularly in asset-backed finance, where returns are tied less to corporate earnings and more to predictable cash flows.

“From the perspective of an asset allocator, it’s really critical to avoid chasing pockets of the market that are expensive, but think about risks that are less correlated to the corporate earnings cycle,” he said.