Pressure is spreading across private credit portfolios, with some of the largest funds writing down assets and flagging default risks as the industry confronts its toughest test in nearly a decade. An analysis of data from fixed-income data provider Solve shows that distressed loans held by some of the biggest private debt investors have climbed back to levels last seen in 2017, when the sector was still grappling with the aftermath of the oil price crash.

Among the 20 largest publicly traded business development companies (BDCs)—listed funds that invest in private credit—the median percentage of loans placed on non-accrual status rose to 2.8% of cost in the second quarter, up from 2% at the end of March. Non-accrual status is a key distress signal in the private credit industry, indicating that borrowers have stopped making payments or that the fund expects them to default imminently.

David Golub, co-chief executive of private credit investor Golub Capital, told investors earlier this month that the industry is seeing "elevated credit stress" as defaults and problem loans multiply. "We are in a credit cycle," Golub said. "For a while there were a lot of people in denial, but now there are very few people who are unwilling to acknowledge reality." Fitch Ratings analysts warned last week that private credit default rates hit a fresh high in July.

Separate data from PitchBook LCD shows that top publicly traded BDCs saw their portfolios shrink again in the second quarter, as funds absorbed asset write-downs while loan sales and repayments outpaced new deal originations. During the quarter, listed vehicles managed by KKR and Blue Owl, as well as Apollo's MidCap Financial fund, all reported higher repayment volumes than new lending. KKR executives pointed to limited deal opportunities and the firm's deliberate push to exit certain loans.

FS KKR Capital Group, KKR's listed fund, disclosed that problem loans accounted for 7.1% of its portfolio in the second quarter—a slight improvement from the prior quarter but still far above the industry average. These figures underscore the challenges facing the private investment industry, which has aggressively bet on private credit as a core growth engine, raising capital from insurers, retirement plans, and high-net-worth individuals. The rapid expansion of these vehicles, combined with lucrative management fees, drove valuations sharply higher for firms including Blue Owl, Ares Management, Blackstone, Apollo, and KKR.

But declining returns and significant outflows from private credit have weighed on those firms' share prices. Industry giants acknowledge that bankruptcies and debt restructurings are returning to long-term averages after an extended period of below-normal default levels. Armen Panossian, co-chief executive of Oaktree Capital's credit business, said: "We are protecting capital and taking a more defensive, risk-averse approach. We want to be in a position to seize opportunities in what we expect to be a more volatile market... Beneath the surface, there are real risks."

Still, many executives across the $2 trillion asset class argue that market panic over private credit distress is overblown, with several firms attributing outflows to media coverage. On earnings call after earnings call, senior executives have said the vast majority of their underwritten loans remain solid, with portfolio companies still growing revenue overall. Craig Packer, co-president of Blue Owl, told investors in one of the firm's funds: "Credit metrics remain healthy, and the issues we are dealing with are still idiosyncratic." Jim Miller, head of Ares' U.S. direct lending business, said borrower fundamentals are "solid," with "interest coverage ratios and leverage levels roughly in line with five-year averages."

Behind that optimism, the outlook for private credit remains complicated, with the industry holding thousands of corporate loans globally. BDC portfolios are heavily weighted toward software companies, which have posted revenue growth—but whether that growth can persist as corporate spending shifts toward artificial intelligence remains unclear. The risks surfacing now are concentrated mostly in deals originated in 2020-2021, when interest rates were near zero, private equity firms were buying aggressively, and asset valuations were elevated. With rates now higher, many companies are struggling to service their debt, and executives have repeatedly pointed to that vintage as the source of the problem.

Higher borrowing costs "have taken away some companies' ability to invest," said Brian High, head of Barings' global private finance team. "Companies are using all their cash flow to pay interest to lenders, and some are growing below their potential as a result." This quarter, lenders including Blackstone and KKR marked down loans tied to software company Medallia. Private equity firm Thoma Bravo abandoned the company earlier this year, writing off its entire $5 billion equity investment and handing the business to creditors. Blackstone's fund valued the investment at under 50 cents on the dollar at the end of June, down from 60 cents in March. Ares' fund took impairments on loans to human resources software company Cornerstone OnDemand, while Blackstone and KKR took control of dental services provider Affordable Care after its debt defaulted.

The stress is also visible in BDC share prices: over the past year, publicly traded BDCs managed by KKR and BlackRock have fallen more than 15%, while Apollo's fund investors have seen returns decline 14.5% over the same period. Some products have rebounded from lows, posting positive returns or turning profitable, including funds managed by Goldman Sachs, Ares, and Golub. BlackRock and others have restructured portfolios—its TCPC vehicle sold $523 million in loan assets to strengthen its balance sheet. Executives said investment banks have been hired to evaluate the vehicle's future path, including options for asset sales and liquidation. Some institutions, including KKR's troubled fund, have chosen to waive portions of incentive fees.

Mitchell Penn, an analyst at Oppenheimer, noted that the sharp decline in BDC share prices amounts to the market "pricing for bankruptcy." His research shows that over the past five years, funds in the bottom quartile have delivered average returns on net assets below the 10-year Treasury yield. "Underwriting standards were not what they should have been," he said. "Screening at the time of lending was not strict enough."