Private credit’s noisy quarter explained: why institutions are still buying in

Private credit has generated a lot of headlines this year, redemption gates, default warnings, retail investors pulling money out of major funds. It’s the kind of noise that makes clients nervous and prompts closer scrutiny of an asset class that has attracted significant portfolio allocations in recent years. Below, we unpack what we believe is actually happening, what the data does and doesn’t show, and why the largest, most sophisticated pools of capital in the market are continuing to allocate in size despite the noise.

The proximate trigger was software. Across the industry, roughly a fifth of business development company (BDC) portfolios carry exposure to software borrowers, and in February, an Anthropic product update showcasing expanded AI workflow capabilities helped ignite what commentators quickly dubbed the “SaaSpocalypse.” The sell-off was narrow rather than systemic: by 10 February, the iShares Expanded Tech-Software Sector ETF was down 19.2% year to date while the broader S&P 500 was still up 1.5%¹.

That equity sell-off is what pushed retail investors toward the exits in software-heavy private credit funds, on fears that a GFC-style event was building and that, if software equity valuations dropped far enough, losses would follow through into the loan market. That anxiety has since eased, with the market now recognising the actual outcome is likely to be more nuanced, with both winners and losers within software rather than a sector-wide collapse. It’s ultimately a question of how exposed individual companies are to AI disruption, a risk that is not just faced by software companies but all investment markets.

North American direct lending funds built to attract institutional capital raised at least US$16 billion in the June quarter, the second-strongest quarter for this kind of fundraising in four years, according to the Financial Times and Preqin data². That happened in the same period several large retail-facing funds capped withdrawals after redemption requests outstripped the quarterly liquidity available in these funds. As a reminder, these evergreen funds set aside preset liquidity reserves each quarter, made available to redeeming investors, and PitchBook’s own research on the sector describes those caps as working as designed, with the broad evergreen fund index staying positive through the pressure³.

Two very different investor bases are looking at the same asset class and reaching opposite conclusions. A PwC survey of more than 120 credit portfolio managers globally, fielded between January and March, spanning the software sell-off, found over 80% expect increased allocations in the year ahead, with only 16% concerned about a rise in defaults⁴. AustralianSuper put a number on that conviction this week: Australia’s largest superannuation fund plans to increase its private credit allocation fivefold, from around 1% of its $410 billion portfolio to roughly 5% in response to the growing proportion of its members reaching retirement age⁵.

Zooming out to the broader private debt market tells a similar story. H1 2026 fundraising is already running at roughly US$210 billion, ahead of the equivalent first-half pace in every year since 2021. Whatever caution retail investors are showing in evergreen vehicles, it isn’t showing up in the broader capital-raising numbers.

For advisers with clients already in the asset class, or weighing whether to enter it, the question isn’t whether the redemption headlines are real. They are. It’s whether they tell you anything useful about where private credit goes from here.

Portfolio fundamentals remain resilient. Northleaf Capital’s Q1 2026 update notes borrower performance has held up overall, with credit risk concentrated in specific pockets (consumer exposure, 2021 vintage loans, AI-exposed businesses) rather than showing signs of systemic stress⁶.

Spreads have widened, and terms have improved. Lord Abbett estimates spreads have widened roughly 50 to 100 basis points since late 2025, alongside less leverage, more covenants, fewer payment-in-kind toggles and tighter documentation⁷. As large lenders moderate activity to manage redemptions, well-capitalised institutionally-backed managers are finding more attractive supply and demand dynamics and greater negotiating leverage on price and terms.

Certainty of execution still commands a premium. Private credit’s core value proposition to borrowers, speed and certainty of execution compared with syndicated markets, hasn’t gone anywhere. That’s precisely why patient, long-duration capital is positioned to be paid more for taking the same underwriting risk it was taking twelve months ago.

The most established measure of private credit performance, and credit health given it also tracks non-accruals and realised credit losses, is the Cliffwater Direct Lending Index, tracking roughly 23,000 loans worth US$560 billion since 2004, spanning the 2008 financial crisis. Cliffwater’s March 2026 results, released May 2026, showed non-accruals and realised losses despite a small tick up remain well below the index’s 2.05% average over the 19 years this metric has been measured⁸.

That contrasts with a newer measure making headlines this year, showing defaults at record highs. It’s worth being precise about what that figure is: it comes from an index that only launched in August 2024, so effectively every reading it has published has been a “record” simply because there’s barely any history to compare it against⁹. It also tracks a narrow portfolio of smaller, lower-rated companies selected because they carry elevated risk, not a representative slice of the broader market. Comparing it directly to Cliffwater’s larger, longer-running, broad-based index isn’t a like-for-like comparison, even though both are legitimate data.

None of this erases credit risk. Manager selection and underwriting discipline through a cycle still matter, arguably more than they did two years ago. But this is no different to any asset class, the measure of all investment managers in their respective fields is how they navigate the current environment.

Institutional investors aren’t allocating to private credit because they’re unaware of the redemption headlines. They’re allocating because they believe resilient fundamentals, wider spreads and improved terms, and continued demand for execution certainty represent a better risk-adjusted entry point than existed twelve months ago. If anything, the retail redemption wave has strengthened that case, by pushing more of the market’s negotiating power toward the patient capital still deploying.

Headlines and fundamentals don’t always move together. The investors with the most sophisticated tools for pricing risk in this asset class, insurers, pension funds, sovereign wealth funds, are treating this moment as one of the more attractive entry points in years. That’s the part of the story that doesn’t always make the headlines.

• The redemption wave was triggered by fears that AI would gut the SaaS business model, given software’s outsized weight in BDC loan books. That fear has eased since February, though which companies will adapt is still playing out.

• Institutional investors poured at least US$16 billion into direct lending funds in the June quarter, one of the strongest quarters in four years, even as retail-facing funds faced record redemption requests. AustralianSuper said it plans to increase its own private credit allocation fivefold.

• Redemption gates are a liquidity mechanism, not a credit signal, and a feature of all private markets vehicles. PitchBook’s research describes the caps as working as designed, and the broad evergreen fund index stayed positive through the pressure.

• Spreads have widened by roughly 50 to 100 basis points since late 2025, alongside stronger covenants, less leverage and tighter documentation, a meaningfully better entry point than a year ago.

• The longest-running measure of credit health, the Cliffwater Direct Lending Index, shows losses remain well below historical averages. The “record high” figures making headlines come from a much newer, narrower index tracking a small sample of higher-risk borrowers.

• Credit risk is an ever-present investment risk. But the broadest data available is telling a calmer story than the headlines, and the market’s most sophisticated capital is acting accordingly.