By Panos Mourdoukoutas
The private credit market showed signs of stabilization in February, with default rates declining, even as investor sentiment continued to weigh heavily on publicly traded private credit funds.
According to Fitch Ratings, the U.S. private credit default rate for the 12 months through February declined to 5.4 percent from 5.8 percent in the 12 months through January.
The agency reported seven private credit default cases in February, with health care providers accounting for two. Health care devices, technology software, building and materials, chemicals, and business services each recorded one case.
Despite the easing in defaults, shares of publicly traded private credit management funds have continued to decline, falling 25 percent to 35 percent since September 2025, as investors react to fears of a broader market downturn.
Investor Sentiment
“Sentiment has dramatically amplified the underlying narrative,” Nadeem Kassam, chief investment strategist and chief operating officer at Marnoa Private Wealth Counsel Ltd., told The Epoch Times.
The catalyst is contagion fears tied to artificial intelligence and software companies, which Kassam believes are particularly misplaced, as exposure to private credit funds in the sector is limited.
Software-related loans and bonds have fallen only slightly, about 3 percent, compared with a roughly 25 percent drop in software stocks. At the same time, exposure to AI and software across private credit portfolios remains relatively limited, averaging around 6 percent of assets, he said.
Kassam said that current valuations suggest asset manager stocks are pricing in a credit crisis that is not yet evident in underlying loan performance.
“Historically, publicly traded alternative asset managers underperform during sector selloffs and outperform materially on the rebound, and the current stress appears more idiosyncratic and firm-specific than systemic,” Kassam said.
Fundamentals
Additional analysis from JPMorgan Private Bank supports the view that recent turbulence is being driven more by sentiment than fundamentals.
The report noted that non-accruals, or non-performing loans—defined as loans overdue by 90 days or not paying interest—among publicly traded business development companies remain relatively low, at around 2 percent. This suggests that recent defaults are isolated rather than indicative of a systemic issue.
Business development companies, created by Congress in 1980 to support capital access for small- and middle-market businesses, are closed-end private credit investment vehicles that provide floating-rate, senior secured loans and are required to distribute 90 percent of their taxable income.
Further insight into the structure of large private credit vehicles is available in the prospectus for BlackRock’s HPS Corporate Lending Fund, which highlights the platform’s scale and integration following BlackRock’s acquisition of HPS Investment Partners. The transaction created “an integrated private credit franchise” with hundreds of billions of dollars in client assets and broad capabilities across senior and junior credit, asset-based finance, and private placements.
The prospectus also highlights that HPS remains responsible for the fund’s investment activities within BlackRock’s broader private financing solutions platform, underscoring the increasing institutionalization and scale of private credit markets.
Valuations for business development companies appear relatively compressed, with the average stock trading at about a 17 percent discount to the value of its underlying assets, near lows last seen in June 2022.
Meanwhile, alternative asset managers’ stocks are valued at about 18 times the fees they earn.
“This group has historically troughed in the mid-teens, suggesting that while negative sentiment may persist, a meaningful amount of pain may already be priced in,” the JPMorgan report stated.
Structural Vulnerabilities
However, some structural vulnerabilities remain. Business development companies typically generate sufficient earnings to cover about double the level of their interest payments, compared with roughly 4 times for large public borrowers. This ratio, calculated by dividing EBITDA (earnings before interest, taxes, depreciation, and amortization) by interest expense, shows that business development companies have a smaller cushion to pay their interest, making their debt riskier on average.
This relatively low coverage ratio leaves a limited margin for error if earnings decline or borrowing costs increase, particularly as bond yields have risen in recent weeks.
Thomas Young, an economist and partner at Econometric Studios, LLC, said current conditions reflect both sentiment and emerging underlying risks.
“The sentiment shift is real in that investors are suddenly focusing on opaque valuations, limited liquidity, and redemption caps. More amazingly, it is not appearing out of nowhere. It is being triggered by underlying stresses and jitteriness regarding forecasted underlying stress: weaker borrowers, tighter exit markets, higher-for-longer financing costs, and sector-specific problems, especially in software,” he told The Epoch Times.
Arthur Azizov, founder and investor at B2 Ventures, described the current environment as an adjustment rather than a breakdown.
“The market is going back to basics, with cash flow and structure in the spotlight again. We know private markets tend to adjust later because there is less visibility. But when things start to move, they also move quickly,” he told The Epoch Times.
“Over the past few years, private credit enjoyed an easy-money, quick-deal environment. This scenery allowed the assumption that refinancing would always be available. And now this belief is being challenged,” he said.
Kassam also pointed to potential tail risks, including the lack of access private credit lenders have to central bank liquidity facilities during severe downturns, as well as the increasing complexity of structured products. These instruments link private credit more closely to the broader non-bank financial system, making risks harder to detect and assess.
“With $340 billion in unused bank commitments available to private credit borrowers per Moody’s, a simultaneous drawdown under stress is the tail risk worth monitoring. Bank loans to private credit funds are typically secured and senior in the capital structure, meaning actual losses would require a deep and protracted recession to materialize,” Kassam said.
