It's Not What You Look at That Matters; It's What You See
In this week's blog, we have a closer look at the Private Credit market, one in which direct lending alternatives like our sector sit comparatively close to, but from a slightly less affluent house. This is a neighbour with a trillion-dollar smile, with a very expensive car in the drive, a perfect garden, and quite a nice extension. For the better part of a decade, private credit was Wall Street's golden child. Institutional investors, pension funds, and increasingly retail investors poured capital into private credit funds, drawn by promises of high yields, steady returns, and a welcome escape from volatile public markets. As recently as 2024 and 2025, these funds were all the rage, swelling to an estimated $3.4 trillion globally. But heading into 2026, the cracks are beginning to show, and in this week's blog, we focus on diversification, transparency, and other ways to access returns from lending.
The initial alarms went off back in September 2025, when auto-parts maker First Brands Group collapsed under the weight of its heavily leveraged debt load. It wasn't an isolated incident. Fellow auto-industry firm Tricolor also went under around the same time, sending shockwaves through the private credit community and prompting JPMorgan CEO Jamie Dimon to issue a now-famous warning: "When you see one cockroach, there are probably more." Billionaire bond investor Jeffrey Gundlach went further, accusing private lenders of making "garbage loans" and predicting that the next financial crisis will originate in private credit. Bank of America's equity strategy team flagged what they called "cockroaches in private lending" and warned of bad loan vintages coming due in 2026. These weren't merely rhetorical alarm bells. They reflected a genuine deterioration in underwriting standards driven by years of intense competition for deal flow. With too much capital chasing too few high-quality borrowers, managers loosened covenants, accepted higher leverage, and pushed into riskier market segments, all in the name of deploying capital and meeting return targets.
Perhaps the starkest illustration of private credit's vulnerabilities came in February 2026, when Blue Owl Capital, one of the biggest names in the space , announced it was permanently restricting withdrawals from its retail-focused private credit fund, Blue Owl Capital Corporation II (OBDC II). Shares in the firm tumbled nearly 10% on the news, hitting their lowest level in 2.5 years. The fund had been under sustained pressure from redemption requests since 2025. Quarterly redemption requests had exceeded the standard 5% cap, and in its tech-focused vehicle, withdrawal requests jumped to around 15% of net asset value. To raise liquidity, Blue Owl was forced to sell approximately $1.4 billion in direct-lending investments across three funds to pension funds and insurers. The episode exposed a fundamental structural flaw in semi-liquid private credit products: the promise of periodic liquidity simply cannot hold when underlying assets are illiquid by design. "This is a canary in the coal mine," said Dan Rasmussen, founder of Verdad Capital. "The private markets bubble is finally starting to burst." Blue Owl is not alone. Across the market, investors pulled more than $7 billion from some of the biggest private credit funds in the final quarter of 2025 alone, according to the Financial Times. And as the Federal Reserve cuts rates, the appeal of floating-rate private credit loans, which are the backbone of most fund portfolios, diminishes further.
Beyond liquidity, private credit has long faced transparency issues. Unlike publicly traded bonds, private loans rarely trade on secondary markets. Fund managers have wide discretion in pricing these assets, creating what critics call "stale marks" valuations that look healthy on paper but may mask deteriorating underlying performance. The US Department of Justice has publicly flagged "creative" valuation practices in private portfolios, while the SEC launched an inquiry into credit ratings firm Egan-Jones, placing the integrity of private credit ratings under a harsh spotlight. A BlackRock private-credit CLO even failed its over-collateralisation test, a structural stress signal that rattled institutional investors. The IMF has warned that valuation uncertainty incentivises fund managers to "delay the recognition of losses", a dynamic that ultimately hurts investors who redeem at inflated prices while those who stay are left holding deteriorating assets.
Experienced credit investors know that when borrowers start exercising payment-in-kind (PIK), essentially choosing to pay interest with more debt rather than cash, the stress is building. It’s something that exists and isn’t a sign of implosion in isolation, but it’s a bit like on the submarine, where someone says, “It always makes that noise”. It’s probably fine. The increased prevalence of PIK arrangements across private credit portfolios is precisely the kind of late-cycle signal that preceded previous credit crises. Combined with covenant-lite structures that offer lenders little protection when things go wrong, the risk profile of many private credit funds looks considerably less attractive than their admittedly attractive marketing materials suggest.
The problems outlined above are not inherent to private lending itself; they are inherent to the fund structure through which most investors access it. Large, pooled private credit funds introduce layers of opacity, illiquidity, high minimum commitments, and management fees that compound even as returns compress. When markets turn, fund investors find themselves locked in, unable to exit, watching valuations lag reality by months or quarters. This is precisely where platforms like ours offer a compelling alternative. Rather than pooling capital into an opaque fund managed by a third party, we provide investors with direct access to individual property-backed loans. The difference matters enormously. In our sector, with direct lending, investors know exactly what they are lending against. Each loan is backed by a specific, tangible asset with an independently assessed value. There are no hidden exposures to highly leveraged corporate borrowers, no payment-in-kind structures, and no manager discretion over how portfolio losses are recognised. Transparency is baked in from the start. Liquidity management is also more straightforward; there is no cliff-edge liquidity crisis because there is no commingled fund structure to sustain. The fee picture is cleaner, too. Private credit funds typically charge management fees of 1–2% plus a performance carry of 15–20% on returns above a hurdle. On a direct lending platform, the economics flow more directly to the investor rather than being skimmed by an intermediary layer of fund management infrastructure.
Private credit funds grew to prominence because they filled a genuine gap, providing capital to businesses and projects that couldn't access bank finance or public markets. That gap still exists, and the demand for flexible, responsive lending hasn't gone away. What has changed is investor awareness of the risks embedded in the fund wrapper that delivers it. As institutional and retail investors alike grapple with gate provisions, murky valuations, and the sobering reality of funds like OBDC II being effectively frozen, demand will grow for more transparent, direct alternatives. Platforms like ours sit precisely at this intersection, offering the return potential of private lending without the structural risks that have made headlines over the past six months.
For investors willing to look beyond the big-name fund brands and embrace a more direct model, the disruption of traditional private credit funds may represent one of the more interesting opportunities of the current cycle, and perhaps for our sector, it’s the next thing to disrupt.
Invest & Fund has returned over £330 million of capital and interest to lenders with zero losses, showing the rigour that governs our business. To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com
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