A "Bank Run" On Private Credit: The $2 Trillion Ticking Time Bomb?

Is private credit really a $2 trillion ticking time bomb for markets? In Part 2 of our Private Credit Mini-Series, we break down the current "run" on private credit funds - from interval funds gating redemptions, to BDCs trading at steep discounts, and what the latest hard data shows about credit losses.

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(Cont.) A "Bank Run" On Private Credit: The $2 Trillion Ticking Time Bomb?

[Ad] Financial Matters with Richard Oring

(Cont.) A "Bank Run" On Private Credit: The $2 Trillion Ticking Time Bomb?

SPEAKER_01 0:00

Is Private Credit a 2 trillion ticking time bomb? And why is there currently a run on private credit funds? Hi everyone, and welcome back to part 2 of our private credit mini-series on Markets with Marcos. As we discussed in our first private credit video, there has been a lot of noise about private credit recently, and it's becoming increasingly difficult to separate the facts from the fiction. But as always, that's why you have us. The trouble started last fall when US Auto Parts Manufacturer First Brands Group and Subprime Autolender and Used Car Retailer Tricolor were first suspected of fraud and had to file for bankruptcy. Private credit funds were involved, but not necessarily center stage in either of these two cases. However, America's largest bank, JP Morgan, did have to write off$170 million against Tricolore in October 2025, and many market observers wondered whether there would be more unpleasant surprises. And it seems JP Morgan's CEO, Jamie Diamond, was joining the ranks of the skeptics when he warned about more possible fraud cases coming to light. Now, Daimon was very careful in his remarks, not to blame an entire market segment, but the headlines were very direct in pinpointing private credit. Jamie Diamond issues private credit warning. When you see one cockroach, there are probably more. And that's when the current storm over private credit really began to form. Market analysts duck into balance sheets and started cautioning that private credit may have too much exposure to potentially troubled industries such as traditional software firms that might lose their business to new competitors with better AI capabilities. Media attention intensified, retail investors took note, and many got nervous. And then it all seemed to reach boiling point when the first headlines appeared that investors who wanted to get out of private credit either had to take steep losses or couldn't do so at all. Like maybe most prominently, in the case of the Apollo Debt Solutions BDC. It started to look almost like a run on the bank, similar to what we saw just three years ago at Silicon Valley Bank. Now, not all the alarmist headlines that we've been seeing looked necessarily like a fair summary of the situation. So let's dig deeper into what actually happened, but in order to do that, we first have to understand how private credit is generally sold to retail investors. So with that in mind, here are the three topics that we'll be covering in part two of our private credit mini-series. 1. What is an interval fund? 2. What is a business development corporation or BDC? And 3. What does the latest hard data actually show us about private credit losses? Let's get started. What is an interval fund? As we discussed in detail in part 1 of our private credit mini-series, linked below for your convenience, one of the defining features of private credit is illiquidity. In fact, and as we've shared in our last video as well, amongst the key reasons for why private credit was able to deliver its strong historical track record, the first, and probably the main reason, is that investors demand an illiquidity premium for private lending versus public alternatives. Remember that by definition, private credit is private, meaning not traded in an organized way. And because private loans are not easily bought or sold, they are often packaged into two types of financial instruments before they are offered to retail investors. And both packages or rappers, as the industry might say, have their own advantages and disadvantages when the time comes to sell them. The first type of financial instrument is interval funds, which play a central role in the current private credit crisis. Interval funds are like normal mutual funds in that they hold the private loans in their portfolio at NAV or net asset value. And if we wanted to simplify it a bit, we could say that the NAV generally assumes a buy and hold scenario for a loan. So if a loan is expected to pay all coupons and repay the principal in full at maturity, the NAV of the loan will generally be 100%. Which makes sense, because that's what the investor will get at maturity under a standard no-default scenario. However, if everyone suddenly wants their money back early, the fund will run into trouble. Remember, private credits illiquidity means that any sale before maturity will generally only be possible at a steep discount, what the industry refers to as a fire sale. So to avoid fire sales, interval funds restrict or gate the amount of redemptions, often to the legal minimum of 5% of the total fund volume per quarter. Now, this shouldn't come as a surprise, as this must be clearly stated in the fund's prospectus. And this is why Ken and I always say to our VIP members and everyone on this channel, make sure you read the prospectus and know what you're buying. So the assumption here is with interval funds that 5% should be available in cash from both interest payments and maturing loans every 3 months. At an interval of 3 months, to use the term. So far so good. And in normal times, being in an interval fund may just mean that you have to wait a bit before you can redeem your shares. However, if a higher percentage of investors want to get out early, interval funds need to start restricting redemptions, and the usual mechanism is to meet redemption requests proportionally. So, for example, if total redemption requests are for 10% of the fund, management would only pay out 50% of every single request to meet the overall 5% limit. So, depending on how much other investors want to redeem at the same time, you may get less than you asked for. For example, only$50 out of every$100 that you wanted back, or maybe even less. It can be hard to predict beforehand. And that's exactly what has been happening recently with many private credit interval funds from Apollo Cliffwater and other firms that you may have read about in the news. More investors wanted out than possible per quarter, which means that many funds started to reject a proportion of every single redemption request to stay under the 5% target. But this immediately fed speculation that the funds had run into trouble, so rumors spread even wider, and the redemption requests kept escalating, with headlines all over the media, like this one. Trapped in private credit, investors wait to pull out 5 billion. And we'll discuss this run on interval funds in the private credit space later on. For now, here are the two key points you need to remember about interval funds. Especially if this is something you had been considering for your portfolio as an entry point into private credit, or if you're wondering right now why you didn't get back everything that you asked from the interval fund you had invested in. First, the fact that an interval fund restricts Gates redemptions does not necessarily mean that it has run into deeper trouble. It just shows you that there were more requests to cash out than they could meet under their quarterly limit. Second, assuming that the fund doesn't have to write down its portfolio, you should still get back your principal at full NAV. But you may have to wait a bit longer. As long as you keep submitting redemption requests, you should get a part of your investment back every three months. Plus, as long as this is really only a liquidity crunch and no deep credit crisis, the fund should keep paying you a regular coupon for as long as you hold any shares. So that was Interval Funds. Let's talk a bit now about the second type of financial instrument that can be used to package and sell private credit to retail investors. What is a business development corporation or BDC? BDCs were created by Congress in 1980 to provide financing to small and mid-sized US companies, including emerging businesses and financially distressed firms. The mechanism for business developed companies or BDCs is simpler than for interval funds. BDCs are a special type of closed-end fund, meaning they sell a fixed amount of public shares on the market and use the proceeds to build a portfolio. In principle, BDCs can hold private loans, equity investments, and even mezzanine capital. But we'll focus on BDCs that hold mainly private loans in this video. BDCs can also use leverage. One interesting aspect of private credit BDCs is their risk profile. Many, if not most of the small and medium-sized businesses they invest in are generally not rated, or if they have a rating, that rating is typically non-investment grade, as we've discussed in part one of this mini-series. However, because each BDC holds an entire portfolio of financing and is often very proactively managed, some BDCs with a good track record can get to an overall credit rating that is better than the sum of the parts, so to speak. This explains why some of the BDCs in the market can have a triple B rating, which is investment great, although at the lower end of the range. The shares of a BDC are liquid and can be traded on any day that the stock exchange is open. But prices will be set by the laws of supply and demand, and could be more, less, or significantly less than the NAV, the net asset value, of the portfolio. And currently, BDC prices are often significantly less than the NAV of their portfolios. For example, the VanEC BDC Income ETF, which strikes the MVAS US Business Development Companies Index, is down almost 26% year on year at the time of this taping for March 26, 2026. There are simply more sellers than willing buyers currently for private credit assets, for all the reasons we just discussed before. So basically, because investors want out, BDC shares are getting beaten down in the current market, and interval funds are getting massive redemption requests that they may not be able to fulfill. But it's hard to say if this is really a reflection of a broader deterioration in private credit fundamentals, or if it is because many retail investors did not fully understand the illiquid nature of their private credit investments. Or perhaps it's a bit of both. Bringing us nicely to the next part of today's discussion. What does the latest hard data actually show us about private credit losses? So, at the time of this taping, the latest available hard data on credit losses seem to point to a more or less benign risk situation for private credit. As Cliffwater, the publisher of the Cliffwater Direct Lending Index or CDLI, wrote in a note on February 23rd, 2026, early year-end reporting shows the health of underlying loans has been largely consistent with that of prior quarters, with only a mild uptick in certain credit health metrics. For example, non-acruals are now 1.48% of cost value, up slightly from 1.33% last quarter, but still below their 2.13% average. In other words, private credit losses aren't flashing red, at least not yet. However, actual losses, losses that have already been realized, are a lagging indicator because it takes a while before things are sorted out after a company has run into trouble, and before you know how much money is really lost in the end. And some early warning signs may be less reassuring. Now, this table from Warningstar shows that in their sample of private credit names, there has been only one payment default, one missed payment each, in December 2025 and February 2026, which was less than in December 2024. And there is only one outright bankruptcy here on this chart. These low numbers are consistent with the generally moderate credit losses that Cliff Water reported, as we just discussed. What has gone up significantly, however, is what Morningstar calls distressed exchanges, which ran significantly higher in both December 2025 and February 2026 than in December 2024. Distressed exchanges are measures by which a distressed borrower, a borrower which has trouble paying, gets some relief to avoid an outright default. An example are the payment in kind or PIC arrangements that we discussed in the first part of our private credit miniseries, whereby the interest due doesn't have to be paid in cash, but gets added to the principal debt for payment at maturity. Of course, distressed exchanges are often done with the intent to give a borrower some breathing space to restructure and recover. And sometimes it may work, and sometimes it may not work. But even a default doesn't always mean that everything is lost for investors. Private credit lenders may have collateral, some type of valuable asset, that they can access to recover at least some of the cash that's due to them. Recovery rates for a senior secured first lien private credit tend to range from 60 to 75% of the exposure in the historical average, depending on the circumstances. So there are mixed messages from the private credit market overall at the time of this taping. Actual credit losses are still low, but there seems to be a trend towards payment-in-kind arrangements and other distressed exchanges that may be an early warning signal that more defaults could be coming. Although starting from a historically low level. In other words, when we look at just the pure data alone that we've shared with you just now, private credit is not exactly in ticking time bomb territory, just yet. At least not in our mind. And especially when you consider that private credit is fundamentally non-investment great, meaning you should always expect a certain rate of troubled loans. Plus, many, if not most, of these private loans may be collateralized. That said, everyone's financial journey is different and you may feel differently, especially if you are a retail investor who sees all these doomsday headlines on private credit about redemptions being declined and share prices falling like a stone. It's a natural instinct to follow the crowd out of the door when you're nervous and can't sleep well at night because you think your savings might be at risk. And it may be completely understandable on a personal level that you would try to find a safe haven for your money, instead of waiting to see if private credit losses are really spiraling out of control. This instinct to get out quickly, however, conflicts with the fundamental illiquidity of private credit. And what we are seeing may well remind some in our community of the run on Silicon Valley Bank back in 2023. However, there's one big difference. Silicon Valley Bank was legally obliged to return all deposits in full and immediately upon request. And when they couldn't, it broke them. In contrast, both types of private credit fund that we have discussed today, interval funds and BDCs, have a safety mechanism. Interval funds have to redeem their shares at their net asset value, but they can limit redemptions to a percentage that should be manageable. And while BDCs allow their shares to be traded freely, as it doesn't affect the underlying portfolio, investors may have to sell at a steep discount well below the net asset value. And remember, not being able to sell your position at all or only with severe limitations, or having to accept a price that may be well below the true fair value if you're in a rush to get out, are almost the classic textbook definitions of an illiquid asset. But that seems to be easily forgotten in the heat of the battle, so to speak, and many investors seem still upset even though they should have been prepared for such a scenario. And it also appears that many asset managers are not prepared for the fast-changing moods and reactions of public retail investors, which can at times be heavily swayed depending on what the latest headlines look like. The big question currently in our mind is this for everyone interested in the private credit space? Is what we are seeing at the moment just teasing troubles of a maturing asset class, and a reminder to all investors that illiquid instruments have their consequences? Or is it more fundamental and the early signs of a credit cycle that may lead to higher losses than anticipated? What do you think? Drop a comment below and let me, Jen, and the rest of the community know. Now, as we often say here at Diamond Nestec, no one has a crystal ball, and we can't predict the future either. But if you're wondering right now whether there may be potential buying opportunities in private credit for you, come join our private VIP Investment Club, where we've been actively discussing this topic. We've linked all the details below for your convenience. And for our VIP members, as promised last week, stay tuned for our upcoming member video on how you could position yourself if you either wanted to pick up some private credit exposure while prices are down, or if you wanted to minimize your risk during these turbulent times. Is Private Credit a$2 trillion ticking time bomb? And why is there currently a run on private credit funds? Hi everyone, and welcome back to part 2 of our private credit mini-series on markets with Marcos. As we discussed in our first private credit video, there has been a lot of noise about private credit recently, and it's becoming increasingly difficult to separate the facts from the fiction. But as always, that's why you have us. The trouble started last fall when US Auto Parts Manufacturer First Brands Group and subprime auto lender and used car retailer Tricolor were first suspected of fraud and had to file for bankruptcy. Private credit funds were involved, but not necessarily center stage in either of these two cases. However, America's largest bank, JP Morgan, did have to write off$170 million against Tricolore in October 2025, and many market observers wondered whether there would be more unpleasant surprises. And it seems JP Morgan's CEO, Jamie Daimon, was joining the ranks of the skeptics when he warned about more possible fraud cases coming to light. Now, Daimon was very careful in his remarks, not to blame an entire market segment, but the headlines were very direct in pinpointing private credit. Jamie Daimon issues private credit warning. When you see one cockroach, there are probably more. And that's when the current storm over private credit really began to form. Market analysts duck into balance sheets and started cautioning that private credit may have too much exposure to potentially troubled industries such as traditional software firms that might lose their business to new competitors with better AI capabilities. Media attention intensified, retail investors took note, and many got nervous. And then it all seemed to reach boiling point when the first headlines appeared that investors who wanted to get out of private credit either had to take steep losses or couldn't do so at all. Like, maybe most prominently, in the case of the Apollo Debt Solutions BDC. It started to look almost like a run on the bank, similar to what we saw just three years ago at Silicon Valley Bank. Now, not all the alarmist headlines that we've been seeing looked necessarily like a fair summary of the situation. So let's dig deeper into what actually happened, but in order to do that, we first have to understand how private credit is generally sold to retail investors. So with that in mind, here are the three topics that we'll be covering in part two of our private credit mini-series. 1. What is an interval fund? 2. What is a business development corporation or BDC? And 3. What does the latest hard data actually show us about private credit losses? Let's get started. What is an interval fund? As we discussed in detail in part 1 of our private credit mini-series, linked below for your convenience, one of the defining features of private credit is illiquidity. In fact, and as we've shared in our last video as well, amongst the key reasons for why private credit was able to deliver its strong historical track record, the first, and probably the main reason, is that investors demand an illiquidity premium for private lending versus public alternatives. Remember that by definition, private credit is private, meaning not traded in an organized way. And because private loans are not easily bought or sold, they are often packaged into two types of financial instruments before they are offered to retail investors. And both packages or wrappers, as the industry might say, have their own advantages and disadvantages when the time comes to sell them. The first type of financial instrument is interval funds, which play a central role in the current private credit crisis. Interval funds are like normal mutual funds in that they hold the private loans in their portfolio at NAV or net asset value. And if we wanted to simplify it a bit, we could say that the NAV generally assumes a buy and hold scenario for a loan. So if a loan is expected to pay all coupons and repay the principal in full at maturity, the NAV of the loan will generally be 100%. Which makes sense, because that's what the investor will get at maturity under a standard no-default scenario. However, if everyone suddenly wants their money back early, the fund will run into trouble. Remember, private credit's illiquidity means that any sale before maturity will generally only be possible at a steep discount, what the industry refers to as a fire sale. So to avoid fire sales, interval funds restrict or gate the amount of redemptions, often to the legal minimum of 5% of the total fund volume per quarter. Now this shouldn't come as a surprise, as this must be clearly stated in the fund's prospectus. And this is why Ken and I always say to our VIP members and everyone on this channel, make sure you read the prospectus and know what you're buying. So the assumption here is with interval funds that 5% should be available in cash from both interest payments and maturing loans every 3 months. At an interval of 3 months, to use the term. So far so good. And in normal times, being in an interval fund may just mean that you have to wait a bit before you can redeem your shares. However, if a higher percentage of investors want to get out early, interval funds need to start restricting redemptions, and the usual mechanism is to meet redemption requests proportionally. So, for example, if total redemption requests are for 10% of the fund, management would only pay out 50% of every single request to meet the overall 5% limit. So, depending on how much other investors want to redeem at the same time, you may get less than you asked for. For example, only$50 out of every$100 that you wanted back, or maybe even less. It can be hard to predict beforehand. And that's exactly what has been happening recently with many private credit interval funds from Apollo, Cliffwater, and other firms that you may have read about in the news. More investors wanted out than possible per quarter, which means that many funds started to reject a proportion of every single redemption request to stay under the 5% target. But this immediately fed speculation that the funds had run into trouble, so rumors spread even wider, and the redemption requests kept escalating, with headlines all over the media, like this one. Trapped in private credit, investors wait to pull out 5 billion. And we'll discuss this run on interval funds in the private credit space later on. For now, here are the two key points you need to remember about interval funds. Especially if this is something you had been considering for your portfolio as an entry point into private credit, or if you're wondering right now why you didn't get back everything that you asked from the interval fund you had invested in. First, the fact that an interval fund restricts Gates redemptions does not necessarily mean that it has run into deeper trouble. It just shows you that there were more requests to cash out than they could meet under their quarterly limit. Second, assuming that the fund doesn't have to write down its portfolio, you should still get back your principal at full NAV. But you may have to wait a bit longer. As long as you keep submitting redemption requests, you should get a part of your investment back every three months. Plus, as long as this is really only a liquidity crunch and no deep credit crisis, the fund should keep paying you a regular coupon for as long as you hold any shares. So that was Interval Funds. Let's talk a bit now about the second type of financial instrument that can be used to package and sell private credit to retail investors. What is a business development corporation or BDC? BDCs were created by Congress in 1980 to provide financing to small and mid-sized US companies, including emerging businesses and financially distressed firms. The mechanism for business developed companies or BDCs is simpler than for interval funds. BDCs are a special type of closed-end fund, meaning they sell a fixed amount of public shares on the market and use the proceeds to build a portfolio. In principle, BDCs can hold private loans, equity investments, and even mezzanine capital, but we'll focus on BDCs that hold mainly private loans in this video. BDCs can also use leverage. One interesting aspect of private credit BDCs is their risk profile. Many, if not most of the small and medium-sized businesses they invest in are generally not rated, or if they have a rating, that rating is typically non-investment rate, as we've discussed in part one of this mini-series. However, because each BDC holds an entire portfolio of financing and is often very proactively managed, some BDCs with a good track record can get to an overall credit rating that is better than the sum of the parts, so to speak. This explains why some of the BDCs in the market can have a triple B rating, which is investment great, although at the lower end of the range. The shares of a BDC are liquid and can be traded on any day that the stock exchange is open. But prices will be set by the laws of supply and demand, and could be more, less, or significantly less than the NAV, the net asset value, of the portfolio. And currently, BDC prices are often significantly less than the NAV of their portfolios. For example, the VanEC BDC Income ETF, which tracks the MVIS US Business Development Companies Index, is down almost 26% year on year at the time of this taping for March 26, 2026. There are simply more sellers than willing buyers currently for private credit assets, for all the reasons we just discussed before. So basically, because investors want out, BDC shares are getting beaten down in the current market, and interval funds are getting massive redemption requests that they may not be able to fulfill. But it's hard to say if this is really a reflection of a broader deterioration in private credit fundamentals, or if it is because many retail investors did not fully understand the illiquid nature of their private credit investments. Or perhaps it's a bit of both. Bringing us nicely to the next part of today's discussion. What does the latest hard data actually show us about private credit losses? So, at the time of this taping, the latest available hard data on credit losses seem to point to a more or less benign risk situation for private credit. As Cliffwater, the publisher of the Cliffwater Direct Lending Index, wrote in a note on February 23rd, 2026, early year-end reporting shows the health of underlying loans has been largely consistent with that of prior quarters, with only a mild uptick in certain credit health metrics. For example, non-acruals are now 1.48% of cost value, up slightly from 1.33% last quarter, but still below their 2.13% average. In other words, private credit losses aren't flashing red, at least not yet. However, actual losses, losses that have already been realized, are a lagging indicator because it takes a while before things are sorted out after a company has run into trouble, and before you know how much money is really lost in the end. And some early warning signs may be less reassuring. Now, this table from Warningstar shows that in their sample of private credit names, there has been only one payment default, one missed payment each, in December 2025 and February 2026, which was less than in December 2024. And there is only one outright bankruptcy here on this chart. These low numbers are consistent with the generally moderate credit losses that Cliff Water reported, as we just discussed. What has gone up significantly, however, is what Morningstar calls distressed exchanges, which ran significantly higher in both December 2025 and February 2026 than in December 2024. Distressed exchanges are measures by which a distressed borrower, a borrower which has trouble paying, gets some relief to avoid an outright default. An example are the payment in kind or PIC arrangements that we discussed in the first part of our private credit miniseries, whereby the interest due doesn't have to be paid in cash, but gets added to the principal debt for payment at maturity. Of course, these stressed exchanges are often done with the intent to give a borrower some breathing space to restructure and recover. And sometimes it may work, and sometimes it may not work. But even a default doesn't always mean that everything is lost for investors. Private credit lenders may have collateral, some type of valuable asset, that they can access to recover at least some of the cash that's due to them. Recovery rates for a senior secured first lien private credit tend to range from 60 to 75% of the exposure in the historical average, depending on the circumstances. So there are mixed messages from the private credit market overall at the time of this taping. Actual credit losses are still low, but there seems to be a trend towards payment-in-kind arrangements and other distressed exchanges that may be an early warning signal that more defaults could be coming. Although starting from a historically low level. In other words, when we look at just the pure data alone that we've shared with you just now, private credit is not exactly in ticking time bomb territory, just yet. At least not in our mind. And especially when you consider that private credit is fundamentally non-investment great, meaning you should always expect a certain rate of troubled loans. Plus, many, if not most, of these private loans may be collateralized. That said, everyone's financial journey is different, and you may feel differently, especially if you are a retail investor who sees all these doomsday headlines on private credit about redemptions being declined and share prices falling like a stone. It's a natural instinct to follow the crowd out of the door when you're nervous and can't sleep well at night because you think your savings might be at risk. And it may be completely understandable on a personal level that you would try to find a safe haven for your money, instead of waiting to see if private credit losses are really spiraling out of control. This instinct to get out quickly, however, conflicts with the fundamental illiquidity of private credit. And what we are seeing may well remind some in our community of the run on Silicon Valley Bank back in 2023. However, there's one big difference. Silicon Valley Bank was legally obliged to return all deposits in full and immediately upon request. And when they couldn't, it broke them. In contrast, both types of private credit fund that we have discussed today, Interval funds and BDCs, have a safety mechanism. Interval funds have to redeem their shares at their net asset value, but they can limit redemptions to a percentage that should be manageable. And while BDCs allow their shares to be traded freely, as it doesn't affect the underlying portfolio, investors may have to sell at a steep discount well below the net asset value. And remember, not being able to sell your position at all or only with severe limitations, or having to accept a price that may be well below the true fair value if you're in a rush to get out, are almost the classic textbook definitions of an illiquid asset. But that seems to be easily forgotten in the heat of the battle, so to speak, and many investors seem still upset even though they should have been prepared for such a scenario. And it also appears that many asset managers are not prepared for the fast-changing moods and reactions of public retail investors, which can at times be heavily swayed depending on what the latest headlines look like. The big question currently in our mind is this for everyone interested in the private credit space? Is what we are seeing at the moment just teasing troubles of a maturing asset class, and a reminder to all investors that illiquid instruments have their consequences? Or is it more fundamental and the early signs of a credit cycle that may lead to higher losses than anticipated? What do you think? Drop a comment below and let me, Jen, and the rest of the community know. Now, as we often say here at Diamond Nestek, no one has a crystal ball. And we can't predict the future either. But if you're wondering right now whether there may be potential buying opportunities in private credit for you, come join our private VIP investment club, where we've been actively discussing this topic. We've linked all the details below for your convenience. And for our VIP members, as promised last week, stay tuned for our upcoming member video on how you could position yourself if you either wanted to pick up some private credit exposure while prices are down, or if you wanted to minimize your risk during these turbulent times.