Private credit is hitting its first real redemption stress test. Here’s the situation in plain English: After 2008, banks pulled back from lending due to tighter regulation. Private funds stepped in and filled the gap. They offered flexible loans with floating rates and higher yields than public markets. In a low-rate world, investors chased returns and diversification. The result was massive growth. Assets went from about $900 billion in 2019 to more than $2 trillion. Then rates spiked after the pandemic. Borrowers started feeling the pressure. Defaults began creeping higher, especially in software and tech where AI is disrupting business models. At the same time, underwriting standards had loosened during the boom years. Now yields are compressing as rates ease, and investors are starting to question valuations that are not marked in real time. A few high-profile blowups flipped sentiment quickly. Now redemption requests are rising across semi-liquid private credit funds. These include non-traded BDCs and interval funds that promised some liquidity, but not full liquidity. Here is the problem though. These funds own illiquid loans. You cannot sell them quickly without taking a big discount. So when too many investors want their money back at once, managers have limited options. They can hold more cash, tap credit lines, or sell assets at lower prices. All of those hurt performance and net asset value for the investors who stay. So what do they do? They gate redemptions. Most of these funds cap withdrawals at around 5 percent of NAV per quarter. When redemption requests jump to 9 to 11 percent or higher, which we are now seeing at firms like BlackRock, Blackstone, Apollo, Morgan Stanley, and Blue Owl, investors do not get all their money back. They get a prorated amount or sometimes a return of capital. In extreme cases, funds can pause redemptions entirely or support the fund with their own balance sheet. This is not a 2008-style crisis. But it is a real stress test of the model. The core issue has always been the same. You are offering periodic liquidity on top of fundamentally illiquid assets. Now we find out whether that tradeoff was worth it.(Anthony Pompliano 🌪)