Private Credit Under Pressure

Higher interest rates, refinancing challenges and growing exposure to artificial intelligence are putting the rapidly expanding private credit market under increased scrutiny. Hedge funds warn that borrower vulnerabilities could become more visible as debt maturities approach.

◉ Rising borrowing costs are exposing weaknesses in private credit portfolios.

◉ Software exposure, AI disruption and refinancing pressures are increasing credit concerns.

◉ Liquidity restrictions and opaque valuations are testing confidence in private lending.

A Growing Credit Challenge

Private credit is entering a more demanding phase as higher borrowing costs, slowing business growth and approaching debt maturities challenge companies that borrowed heavily during the low-interest-rate environment.

At the 2026 Global Financial Leaders’ Investment Summit in Hong Kong, senior executives from major hedge funds highlighted growing vulnerabilities across the market.

Davidson Kempner Capital Management’s Tony Yoseloff pointed to the concentration of risks around interest rates, valuations and technology exposure. A substantial portion of US private credit lending has flowed into software companies, creating additional uncertainty as artificial intelligence reshapes the sector.

The refinancing calendar is another concern. Significant volumes of corporate debt are expected to mature in 2027 and 2028, potentially forcing borrowers to refinance at considerably higher financing costs than those available when their original loans were issued.

The AI Exposure Question

Technology has become an increasingly important component of private lending.

However, AI-driven disruption creates a complicated environment for lenders. Software businesses that previously generated predictable recurring revenues may face changing competitive dynamics, pressure on margins and uncertainty over future business models.

This creates a potential mismatch between historical financial performance and future debt-servicing capacity.

The challenge extends beyond software companies. AI infrastructure investments, including data centres and computing equipment, are increasingly financed through private credit structures.

These assets introduce additional valuation considerations because collateral values, equipment depreciation and future demand can change faster than private loan valuations are updated.

Liquidity Becomes a Central Risk

Private credit differs from publicly traded corporate debt because loans are generally not exchanged on transparent, continuously priced markets.

Consequently, valuations frequently rely on internal models rather than observable market transactions.

This can create challenges when investors request withdrawals during periods of uncertainty.

Some private credit vehicles have already faced redemption pressure, with withdrawal restrictions highlighting the structural difference between investors’ liquidity expectations and the underlying assets’ limited marketability.

Credit rating analysis has also identified increased payment-in-kind interest arrangements, where borrowers postpone cash interest payments by adding them to outstanding debt.

Although these arrangements can provide temporary financial flexibility, growing reliance on them may indicate pressure on corporate cash flows.

Systemic Risk or Market Adjustment?

Despite the growing warnings, private credit is not necessarily approaching a repeat of the 2008 financial crisis.

The industry continues to attract institutional capital, and aggregate credit quality remains relatively stable across significant portions of the market.

However, rapid expansion has increased connections between private lenders, banks, insurers and investment funds.

The central question is whether these institutions can absorb a prolonged period of higher financing costs without triggering broader liquidity and credit problems.

Private credit’s next phase will likely be determined less by its historical growth rate and more by the quality of its borrowers, transparency of valuations and ability to manage refinancing demands.