Private Credit Hasn’t Gone Away

Headlines vs Reality: What’s Driving the Narrative?
We’ve all seen the headlines. Investors are pulling their money out of Private Credit funds due to concern about the risk of defaults, exposure to particular sectors such as software and valuations.

But who is pulling out?  And what does it mean for the Private Credit category as a whole?

In this article we’re not going to argue about the investment case for Private Credit. We agree the long-term drivers are still highly relevant and note that several industry leaders including Larry Fink, CEO of BlackRock, made public announcements to this effect last week across their firms’ various earnings calls.

Looking at the firms and the funds which have faced the most pressure on redemptions it’s clear most of the damage has been restricted to primarily retail focused BDCs, with funds exposed to software companies most affected.

Institutional vs Retail: A Tale of Two Reactions At Phronesis, as an evidence based research consultancy, we prefer to focus on the investor view and sentiment towards the category.  So where is investor sentiment at the end of April 2026?

Firstly, let’s quickly look at institutional investors. Based on interviews we’ve conducted during April 2026, we’ve found investors remain confident in the category, and the managers they have already selected. We are not hearing of any significant plans to change pacing models in response to recent news or events.

A few have spoken about the need to double down on due diligence if taking on new managers but otherwise it’s a case of carry-on as before which aligns with Larry Fink’s view.

Fear, Liquidity and Investor Behavior
However in the retail world, it’s clear the headlines have had an impact on confidence, and many have been expressing reservations about the category. They’ve been spooked by hearing terms like loan write-offs and credit defaults or references to managers not allowing investors to withdraw their money.

Terms like write-offs and credit defaults can be triggering for investors as they imply a risk of losing an entire investment, not just a small loss in percentage terms. They also remind investors of a certain age of the 2008/09 GFC.

Fear of loss is a powerful human emotion which often causes investors to behave irrationally. In this case, it has caused investors to rush to withdraw funds even though there is still a long-term investment case for private credit. Economists would argue this is irrational behavior as investors have been happy to crystallize losses.

This desire for liquidity has been exacerbated by the fund structures. Interval funds typically only permit withdrawals on quarterly basis and several investors have expressed their fear to us that markets were going to get worse before they got better, a not unreasonable assumption given the volatility caused by the war in the Middle East.

So investors felt they should withdraw their money now rather than risk waiting three months when valuations might be lower still. From an investor point of view, being stuck in an investment that is going down, and from which they can’t extricate themselves from is their worst nightmare.

So while at first glance the decision to withdraw funds may appear to be irrational as it is at odds with the long-term case for private credit, when you view it through an investor lens, you can see that this behavior is perfectly rational and sensible.

What investors are effectively saying is that a small known loss is acceptable, when compared to risking having their entire investment wiped out. It’s an almost perfect demonstration of the principle of cutting your losses - something we frequently observe in our behavioral science work when investors are faced with uncertainty and loss.

What Happens Next? So the next question is whether these investors will come back? Or will other investors be willing to invest for the first time in private credit?

Our suspicion is that most investors will take a wait-and-see approach, at least until market volatility settles down. But then they will gradually drift back. The lure of higher risk adjusted returns, of portfolio diversification with the added bonus of dampening the effects of volatility will be attractive to many.

But it will probably change their behavior. They will likely be more selective about the managers they invest with, and together with advisors they will gravitate towards the most well-known firms as these tend to have the largest funds which in theory makes them less susceptible to liquidity issues.

Investors (and their advisors) want firms to be transparent about how they value their funds and how their redemption policies work when 5% subscription thresholds are breached.

Q1 will be a wake-up call for both. While fund policies would have been communicated at the time of purchase via prospectuses and other fund documents, seeing it play out in real life quickly brings it into focus. Firms which communicate well on issues like this, including explaining clearly why they followed a certain strategy in Q1, are likely to be the winners as the market recovers.