Private credit faces deepening losses and investor caution

Aggregate unrealised losses at 51 business development companies climbed to 2.35% of net asset value in the first quarter of 2026, marking the sector's steepest quarterly decline since mid-2022. This erosion of portfolio fundamentals highlights growing anxiety over profitability and the sustainability of debt servicing in private credit markets.

Regulatory filings with the U.S. Securities and Exchange Commission reveal a cooling environment for private credit lenders. Analysts at BofA Global Research noted a distinct credit deterioration across the BDC complex, characterized by stagnating assets under management and widespread earnings contraction. Portfolio leverage remains elevated, and interest coverage metrics show signs of instability. A critical indicator of this stress is the reliance on payment-in-kind (PIK) interest, which allows borrowers to defer cash payments by adding them to debt balances. Reuters data shows PIK interest income reached $477 million during the first quarter, signaling that underlying borrowers are increasingly struggling to maintain cash-based servicing.

Apollo Global Management President Jim Zelter warned that the sector has not yet cleared this period of turbulence. Addressing investors at the Bernstein Strategic Decisions Conference, Zelter noted that wealthy individuals continue to seek redemptions from private credit funds. He expects these outflows to persist, suggesting that the recent pattern of investors attempting to exit their positions is unlikely to abate soon. While the European Central Bank maintains that private credit does not currently pose a systemic risk to the euro zone, it acknowledged that firms backed by private credit are finding it harder to meet interest obligations from operating cash flows, a trend diverging from the relative stability seen in traditional bank-funded companies.