By Ian Salisbury

Warning signs are piling up as people keep channeling cash into private-credit funds. Dividends are being cut and some high-profile bankruptcies are spooking investors.

Retail-oriented private-credit funds, investment pools that make loans to midsize companies, hold more than $213 billion, up nearly 50% in the past year, according to a report Friday from Goldman Sachs. Together, they account for roughly half of the retail money invested across the alternative-asset universe.

But the private-credit trend may be starting to show its age.

Goldman's report also notes that the flow of money into other popular areas, such as infrastructure and private equity, grew at a faster clip in the past year. Alternative asset managers appear to be shifting attention away from offering new private-credit funds that focus solely on making loans and toward funds with broader strategies, or faster-growing areas like infrastructure.

Alternative managers' stock prices seem to reflect the waning excitement. Shares of credit-focused managers, including Apollo Global Management, Ares Management, and Blue Owl Capital are all underwater this year, Goldman said. More diversified firms such as KKR should fare better, the bank suggests.

There are several reasons for the shift. Investors have flocked to private- credit funds for their yields, which often top 10%, more than double what people can earn on 10-year Treasuries. But private-credit funds typically issue floating-rate loans.

With the Federal Reserve now in rate-cutting mode, the interest income pouring into the funds is under pressure, so investors are bracing for funds to cut their dividends. The $47 billion Blackstone Private Credit Fund, the industry's largest player, colloquially known as BCRED, reduced its payout by 9% last month, citing the "lower rate environment."

A less immediate, but potentially bigger worry is the funds' credit quality. That is more of a concern now that the economy is slowing down; hiring is weak and the government is shut down.

Private-credit fund managers often point to the quality of the loans they own, noting these are senior to other forms of debt. However, many funds also borrow money themselves to increase the amounts they can lend out. That means that even a small increase in defaults can lead to outsize losses for investors.

As a result, private-credit yields are often compared with those in risky corners of the fixed-income markets such as junk bonds and leveraged loans.

In the past few weeks, a spate of bankruptcies such as used-car dealer Tricolor Holdings and auto-parts company First Brands have been stoking these fears. A Barron's article earlier this week , traced Tricolor's many ties to so-called nondepository financial institutions, a group that includes private-credit funds. A recent report from fund researcher Morningstar highlighted a number of private-credit funds with exposure to First Brands, including vehicles overseen by well-known firms like Franklin Templeton and Calamos.

So far, there is little evidence of widespread losses. But useful information about funds' credit profiles isn't readily available, making it hard to judge. Funds are transparent in that their regulatory filings often include a long list of every loan a vehicle owns. But they lack the standardized fact sheets and easy-to-look-up value quotations that have long guided retail investors when it comes to mutual funds.

Investors are right to be cautious. Private credit's rapid growth in the past few years means most funds haven't been tested by a prolonged downturn, much less a major recession like the one that resulted from the 2008-2009 financial crisis. Anyone who lived through that must remember that credit risk finds its way into unexpected places and can sneak up on complacent investors.

Write to Ian Salisbury at ian.salisbury@barrons.com

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October 11, 2025 02:30 ET (06:30 GMT)

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