“When you see one cockroach, there’s probably more.”

That’s how Jamie Dimon described the private credit market in October last year, after a string of high-profile bankruptcies. At the time, the JPMorgan head honcho warned that stress in credit markets rarely shows up alone.

More recently, he was less pessimistic. He told analysts he’s “not particularly concerned,” as the company disclosed a $50 billion exposure to private credit during its first-quarter earnings call. Fed Chair Jerome Powell agreed, saying that the private credit market isn’t flashing signs of systemic risk right now.

That said, there are a couple of things you can’t ignore. These funds saw record redemption requests in the same first quarter. As Morgan Stanley CEO, Ted Pick put it, “While it’s still a growing asset class, private credit is ‘having a learning moment’.” He added, “We’ll call it an adolescent moment, where both the lenders and the borrowers are being looked at carefully.”

Retail investors are not as optimistic

For years, private credit felt like easy money. Investors put in cash, earned steady returns, and didn’t worry much about getting it back quickly. That worked as long as money kept flowing in.

But part of the issue right now is who the money is coming from. Private credit used to be dominated by large institutions. In recent years, more retail money has come in through Business Development Companies, or BDCs, drawn by steady 9–11% yields, especially after 2021 when access widened.

As the Federal Reserve raised rates, bonds struggled while private credit payouts moved higher. Banks also pulled back from riskier lending, giving these funds more room to grow. It turns out however, that retail investors spook more easily. Investors are asking to withdraw roughly 10% of their money, but funds are allowing only about 5% at a time. That gap in withdrawal limits makes it look like a queue is forming at the exit, causing additional panic.

You can already see it in the numbers. Blue Owl’s Credit Income fund faced requests of nearly 22%, and its Technology Income fund saw over 40% of investors trying to pull money out, yet both stuck to the same ~5% payout.

When funds need to return cash, they often sell their better loans first, the ones that are easier to offload. What’s left behind is weaker. At that point, the mindset shifts, and you are no longer just investing for returns. As Bloomberg journalist Tracy Alloway puts it, “Private credit doesn’t have to dramatically crash to hurt. It just has to stop growing.”

Where the cracks are starting to show

But why are investors suddenly rushing to pull money out?

A large part of the answer lies in where the capital has been going. Private credit firms have lent heavily to smaller companies that banks usually avoid. This is an underserved space, since they fall outside traditional lending comfort zones. Private credit filled this gap after the 2008 financial crisis forced stricter norms for traditional banks.

This worked well when borrowing was cheap. But rates jumped between 2022 and 2024 as the US moved away from its ‘zero interest rate policy’ era, post-Covid. While the last year or so has been somewhat of a rate-cut cycle, most of these loans were written when borrowing costs were much lower.

The catch is that many of these loans come with floating rates. So when rates moved up, the interest payments moved up with them, and they haven’t eased much yet. There is also some crowding in where the money has gone. Analysts estimate that around 15% to 25% of private credit portfolios are tied to software companies. This is becoming an area of concern, as AI starts to replace some of the services these software companies were built around. Investors also become nervous as AI CEOs like Anthropic's Dario Amodel claim, correctly or not, that AI is set to replace these SAAS services en masse.

Recent blowups have also made people more cautious. In cases like First Brands and Tricolor, the same collateral was pledged more than once. JPMorgan, for instance, took a $170 million hit tied to Tricolor’s bankruptcy, with CEO Jamie Dimon calling it “not our finest moment.”

These have raised a more basic question: how closely were some of these loans checked in the first place?

While there hasn’t been an unusual number of missed payments so far, Morgan Stanley estimates default rates in direct lending could rise to about 8% in a stress scenario, similar to the pandemic period.

None of this is a red flag by itself. But put it together, and you can see why investors are getting a little uneasy.

Banks see opportunity where others see stress

Panic selling is weighing on sentiment in the private credit space, denting valuations. Firms such as Blackstone , Apollo Global Management , Blue Owl Capital, and Ares Management are trading at a discount to their levels at the start of the year.

Funds with more than $3 billion in assets are trading at a median discount of 25% to their net values. This discount was around 16% at the start of the year, and there was almost no discount a year ago.

For some investors, this gap reflects rising uncertainty around valuations, liquidity, and credit quality. But others are swooping in. Oaktree’s Howard Marks, the dean of distressed investing, likes to say that there are no bad assets, only bad prices.

As selling pressure builds, long-term capital is stepping in. Morgan Stanley is setting up a fund to buy private credit assets at discounted levels, while Pacific Investment Management Company recently purchased an entire $400 million bond issuance from a private credit fund linked to Blue Owl Capital.

Just this week, Adams Street Partners raised $7.5 billion for its latest private credit vehicle, more than double its previous fund. Carlyle Group launched a new strategy focused on asset-backed finance, while Ares Management is recalibrating fund sizes to deploy capital more quickly in what it sees as a more attractive entry environment.

On one side, some investors reassessing risks, and rushing for the exit. But it looks like the smart money isn't leaving, and large pools of capital are being raised to buy what those exits leave behind.

“The fog of private credit is going to clear,” says Rached Lord, a senior executive at BlackRock . “There's volatility, but there isn't a bubble.”