It has been a long time since I tossed and turned at night, unable to sleep due to all of the worries dancing around in my head. What is the point? Why worry about those things which you can’t control? Further, why not change those things you can control so you no longer worry about them? My experience has been the more I worry, the more nervous I get, and the more mistakes I tend to make.
Then, there is the simple fact that no matter what I, you, we, they do today, the sun will come up in the East in the morning.
However, there are certainly some things which concern me more than others. I would be extremely unusual if that weren’t the case, if I simply skipped and whistled down the primrose path which runs past the graveyard. Although, I have to admit… sometimes that sounds pretty sweet.
When it comes to the current state of affairs in the markets and economy, two things concern me above all else. These are mine, and mine alone. The other members of the Investment Committee here at Oakworth Capital Bank have other worries, which we all shared at a recent team meeting.
Ah…so many bricks in the proverbial ‘wall of worry.’
Private Credit
The, shall I say, developing challenges in the ‘private credit’ sector has not yet received the attention it deserves. To be sure, there has been a fair amount of ink about investors trying to get out of Funds X, Y or Z. Further, I have read a number of stories involving concerns about ‘past dues’ and potential defaults in the sector.
While those things aren’t a lot of fun, they don’t keep me up at night. As I have already written, nothing really does. What concerns me the most is that ‘private credit’ has been a very important source of liquidity for a certain type of borrower, one which arguably might not neatly fit within the ‘normal’ credit channels.
As a recent article by Ted Berg and Jung Hoon Lee at the Office of Financial Research recently put it:
- “Private credit funds play a vital role in credit intermediation, particularly for small and midsize companies unable to access bank loans and public credit markets like those for bonds and broadly syndicated loans. Private credit funds, which originate loans and hold them to maturity, work closely with borrowers to monitor credit quality and aim to provide funding flexibility during periods of market stress, which helps mitigate bankruptcy risk…” (emphasis added). (1)
- “The private credit market has grown substantially over the past decade. In fact, when the SEC adopted Form PF for private fund reporting in 2011, private credit was not included as a distinct investment strategy category on the form. According to Preqin, assets under management (AUM) for domestic private credit funds have more than tripled in the last decade, representing a 14% compounded annual growth rate. As of year-end 2024, the U.S. private credit market, including BDCs, exceeds $1.6 trillion. This amount is larger than traditional domestic corporate credit markets for broadly syndicated loans and high-yield corporate bonds” (emphasis added). (1)
It would seem, intuitively, the tripling of the ‘private credit fund’ sector to an estimated $1.6 trillion at the end of 2024 has been a meaningful source of liquidity in the U.S. economy, particularly for, as the article described them: “small and midsize companies unable to access bank loans and public credit markets like those for bonds and broadly syndicated loans.”
I might argue the following: Private credit funds are a critical source of liquidity for a large segment of the economy. As investors have poured money into these funds since the end of 2011, this source of liquidity has grown larger and, therefore, more important to economic activity than it once was.
Upon rereading that paragraph, I freely admit it is not as insightful as I would like for it to be. In fact, I said “duh” to myself when I finished.
Recently, as in the past several months, reports have indicated that some investors have been trying to get their money out of ‘private credit funds.’ Fortunately, I believe, a lot of these funds have redemption caps which limit the amount folks can withdraw at a time, often per quarter. Otherwise, the recent request for withdrawals could turn into a rout.
Consider what Joy Wiltermuth at MarketWatch.com wrote in her article of June 3 and 4:
- “A fresh wave of investor redemptions has hit the roughly $2 trillion private-credit market, sending shares of the sector’s industry giants sharply lower on Wednesday.” (2)
- “This time, the selloff can be pegged to news reports of redemptions that were capped at 5% at the $31 billion Cliffwater Corporate Lending Fund in the second quarter, as well as limits on fund withdrawals at Partners Group, a Swiss and U.S. private-equity firm with $185 billion in assets under management.” (2)
- Wednesday’s selloff comes after several boom years that saw double-digit annual returns. Returns have been smaller lately, in a backdrop of persistently higher Treasury yields and overall borrowing costs. The Cliffwater corporate fund reported a return of 1.7% on the year so far. Many investors are now questioning the industry’s opaque lending practices and the quality of loans held by funds. Private-credit funds also tend to have larger exposure to loans to the software industry than other established parts of U.S. credit markets.”(2)
Of course that is just one article. If you would like to see or read more, Google: private credit redemptions. As of 10:14 am CDT on June 5th, 2026, there were a lot of articles from which to choose.
Intuitively, if that many folks are trying to get their money OUT, it would seem net inflows into the asset classes would be either slowing or contracting. This is important. IF this is the case, and there is some evidence to suggest that it is, this could mean there will be less credit extension forthcoming from this increasingly important source of liquidity.(3)
Put another way, some of those “small and midsize companies unable to access bank loans and public credit markets like those for bonds and broadly syndicated loans,” which might have depended on private credit funds for capital in the recent past, might have trouble obtaining future financing. Clearly, IF that is the case, this could impact overall health of their balance sheets including their existing loans.
In essence, everything is great as long as money flows are positive.
- Will they be if-and-when they turn negative?
- What happens then?
- Not just to the underlying loans, which likely won’t be good, but to the overall economy?
- If investors outflows cut off that source of liquidity/cash/capital?
Great question.
Clearly, I am painting an ugly picture with a dirty brush here. While worst-case scenarios can always happen, they usually don’t. That is why we call them ‘worst-case,’ as opposed to probable-case.
To that end, the probable-case scenario dancing around in my mind for this asset class over the next several years is lower rates of return due a variety of reasons. Due to these lower returns, inflows into the category may slow from the feverish pace of the previous decade. This could lead to a reduction in the extension of credit in the broader financial system, as funds have less money to loan. This could slow the growth in the money supply and, therefore, overall economic activity.
However, I will stop well short of saying (or otherwise implying) a doomsday scenario or ‘financial crisis.’ I simply mean investors will probably take their marbles and look for other ways to invest or even lend. There will likely be ramifications when this happens, but they don’t have to be ruinous.
My experience has been that periods of financial innovation occasionally introduce risks that are not immediately apparent. Further, folks don’t always ask enough questions when presented with, say, a 10% opportunity in a 5% market. Why would anyone be willing to part with such a thing IF that were truly the case? Wouldn’t someone else, somewhere, have gobbled it up before it got down to you? Before being swayed by promise of higher returns, take time to understand the risks and trade-offs involved.
Yes, a slowdown, hiccup or whatever you want to call it in the private credit sector/category is a concern of mine. It isn’t a worry. The worst-case scenario likely won’t happen, because it usually doesn’t. Further, if it is a known concern, I should be able to implement some sort of strategy to alleviate or otherwise mitigate it.
Interestingly, it seems it is nearly impossible to fully foresee those things for which we should worry. Further, these are often things which we can’t really control. Everything else, we can do something about in some manner, which takes a worry down to a concern…at least in my way of thinking.
If that is skipping and whistling down the primrose path past the graveyard, well, then so be it.
Next week, I will discuss the other primary concern of mine.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris, Chief Economist
Sources:
- Office of Financial Research – Measuring Counterparty Exposures to Private Credit. March 12, 2026.
- MarketWatch – Another Redemption Wave is Spooking the $2 Trillion Private Credit Market. June 4, 2026
- Reuters – Private Credit Boom Cools as Lending Flows Slow Sharply, June 5, 2026.
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