Original author: Stani.eth

Translation: Ken, Chaincatcher

Private credit is currently in a peculiar situation.

The economy is closely related to the cost of capital. Low interest rates mean low borrowing costs, which should theoretically lead to higher utilization rates of credit instruments. Conversely, high interest rates mean high borrowing costs, which should theoretically reduce the demand for credit.

Since the Federal Reserve initiated an aggressive tightening cycle in March 2022, we have been living in a high-interest-rate environment: by mid-2023, rates skyrocketed from near-zero levels to over 5%, marking the fastest rate hike cycle in forty years. Interest rates are expected to remain high until early 2026, with only minor cuts anticipated during this period. This means significantly increased capital costs for many consumers and businesses that started borrowing during periods of low to moderate interest rates and still have outstanding debts, and this burden will continue to escalate over time.

All of this sounds quite normal. From growth to maturity, financing is almost throughout every stage of a company's life cycle. But the problem is that when the cost of capital remains high for an extended period, it creates unbearable expenses for borrowers.

Companies typically borrow from banks or other financial institutions, or they borrow from asset management firms in the form of private credit.

How do private credit funds operate?

Private credit funds are typically closed-end or semi-liquid investment vehicles managed by asset management companies. This structure makes sense: funds need to deploy capital into lending opportunities to generate returns. The investor base for private credit is wide-ranging, from pension funds, insurance companies, and family offices, to an increasing number of retail investors.

Closed-end funds do not allow redemptions before maturity (typically 7 to 10 years). Semi-liquid funds provide quarterly redemption windows with limits. Meanwhile, publicly traded Business Development Companies (BDCs) offer liquidity through daily trading on exchanges.

Essentially, private credit funds function similarly to private banks: they lend to businesses and charge interest.

What sectors does private credit fund?

Generally, private credit finances leveraged buyouts for private equity, provides loans to mid-sized companies that cannot access public bond markets, and finances certain asset-backed loans (such as aircraft, shipping, and consumer loans), as well as real estate credit.

Private credit funds typically fill the financing gap left by banks withdrawing from higher-risk corporate lending. This shift has been driven primarily by regulatory policies after 2008 (especially Basel III), which forced banks to exit riskier corporate loan businesses. Today, it is estimated that 80% to 90% of leveraged buyouts in the U.S. mid-market are financed by private credit.

Who are the major players?

• Apollo ~$460B AUM

• Blackstone ~$330B AUM

• Ares ~$280B AUM

• KKR ~$220B AUM

• Carlyle ~$190B AUM

• Blue Owl ~$170B AUM

What is the current situation?

Recently, the private credit sector has begun to show signs of distress. The high capital costs associated with high interest rates continue to be a real concern, while artificial intelligence is reshaping perceptions of many software companies financed by private credit, bringing uncertainty to the future of these borrowers.

The market has started to reprice private credit:

• VanEck BDC Income ETF: down approximately 15% in the past year

• Blue Owl Capital: down approximately 50% in the past year, with about 30% of that decline occurring in 2026

• Apollo, Blackstone, Ares, KKR: stock prices have dropped approximately 20% due to concerns over private credit

Currently, BDCs are trading at an average discount of about 20% to their net asset value (NAV), while offering yields of 10% to 11%, sending a clear signal: loan portfolios may be overvalued, default rates may be rising, or liquidity risks are accumulating. More concerningly, historically these funds have typically traded at a premium.

Some funds have reported loan default indicators as high as 9%. Blackstone's flagship private credit fund BCRED is a prominent example.

BCRED recently restricted redemptions. The fund has approximately $82 billion in assets under management, and in the first quarter of 2026, redemption requests reached $3.7 billion, about 8% of its NAV. Blackstone injected $400 million of its own funds to support liquidity. Technically, the fund has not been fully gated, but it is very close to that.

Meanwhile, BlackRock's $26 billion HPS corporate loan fund (HLEND) received $1.2 billion in redemption requests, reaching a point where redemptions had to be frozen. About $580 million in redemption requests went unfulfilled.

Blue Owl's retail-oriented private credit products experienced $2.9 billion in redemptions in the fourth quarter of 2025, with redemption requests reaching 15% of NAV, largely due to its exposure to software industry loans.

Can the market withstand defaults in private credit funds?

Despite total redemptions exceeding $7 billion (representing 5% to 10% of NAV) and stock prices of publicly listed alternative asset management companies dropping 20% to 30%, the overall private credit market still amounts to a massive $1.8 trillion to $2 trillion. Even the largest funds are only in the $20 billion to $80 billion range, whereas the global bond market is valued at $130 trillion, and bank assets amount to $180 trillion. A default by a single fund is highly unlikely to trigger a wider market collapse or induce a contagious amplification of crises. Moreover, large funds hold diversified portfolios containing hundreds of loans, and the semi-liquid or closed-end structures naturally force investors' capital to be locked in, thereby buffering against bank run-like risks.

I have outlined three scenarios of increasing severity:

• Scenario A: A large fund defaults (about $50 billion). Investors lose capital, some companies lose financing, and credit spreads widen. The financial system is likely able to absorb this shock.

• Scenario B: Multiple funds collapse simultaneously. The credit market freezes, highly leveraged companies are unable to refinance, triggering a chain of defaults. This could prompt a recession in the credit cycle.

• Scenario C: A collapse of private credit + leveraged loans. A broader corporate credit crisis erupts: private equity deals fail, and banks face risk exposures. This would represent a true systemic crisis.

Fortunately, from a macro perspective, the scale of private credit funds remains relatively small and unlikely to create systemic risk on its own. However, the most concerning scenario is that a loss of confidence initially spreads in the private credit market (particularly in sectors extending loans to businesses vulnerable to AI disruption), before seeping into the public bond market. This contagion pathway is entirely plausible, as it can be argued that, compared to the lean, high-growth companies typically financed by private credit, larger companies in the bond market are more susceptible to automation and AI disruptions.

What implications does this have for RWA and DeFi?

The most direct impact of the private credit predicament falls on capital allocators. Many private credit funds have already been distributed to retail investors through publicly traded BDCs, private credit ETFs, or semi-liquid funds (such as Blackstone's BCRED, Apollo's Debt Solutions BDC, and BlackRock's HPS corporate loan fund).

These funds share common characteristics: quarterly (or monthly) redemption windows with limitations on redemptions typically capped at 5% of NAV per quarter, targeting returns of 8% to 11%. Recently, some funds have also begun to freeze redemptions.

From the perspective of DeFi capital allocators, I believe the largest risk is structural: the way private credit is packaged in DeFi is often not fully understood by many retail-focused users before they invest. We have seen countless examples where DeFi users actively invested in high-yield real-world asset (RWA) strategies only to later discover that their underlying exposures carry significant duration risks.

I believe that real-world assets (RWA) represent the greatest opportunity for DeFi in the near term. However, my biggest concern is that institutional speculators may view DeFi as a channel to offload illiquid and distressed products loathed by Wall Street, effectively treating DeFi participants as exit liquidity. Because assessing RWA allocation opportunities is inherently more difficult, this risk is further amplified: since they do not possess the transparency or on-chain verifiability that native DeFi opportunities provide.

That said, if private credit can operate well on-chain, it could offer something that traditional finance cannot: assurances enforced by smart contracts. Redemption windows, withdrawal limits, collateral ratios, and allocation rules can all be immutably encoded, meaning fund managers cannot unilaterally change terms after capital has been committed. In traditional private credit, investors in BCRED and HLEND paid the painful price of discovering that as market conditions worsened, fund managers could decide to tighten or freeze redemption policies. However, on-chain, these rules are transparent from day one and enforced by code, rather than dictated by stressed fund managers. This is precisely where RWA and DeFi can surpass traditional models in this asset class.

For RWA to succeed in DeFi, and for DeFi to achieve meaningful scale through real-world assets, the entire industry needs to thoughtfully and cautiously build opportunities that connect TradFi (traditional finance) and on-chain markets. This means establishing strong transparency standards, appropriate risk disclosures, independent verification of underlying collateral, and governance frameworks to protect on-chain participants from the disadvantages of information asymmetry. Without these safeguards, the fusion of TradFi and DeFi risks becoming a mere extraction rather than a value additive.

DeFi should not become Wall Street's exit liquidity.

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