Why investors are pulling out of private credit

Ever since the 2008 financial crisis, investors have been pouring money into what's known as private credit — they’ve loaned nearly $2 trillion to businesses that were unlikely to get loans from banks.

Lately, they've been getting jittery, worried by some high-profile defaults and the future prospects of some of the loans they’ve made. So, many investors have been pulling money out of private credit. And to some people, it’s starting to look like an old-fashioned bank run.

Private credit has gotten as big as it has because of the financial crisis. Banks lost a lot of money on loans, and Washington had imposed new lending regulations, according to Kent Belasco, director of the Commercial Banking Program at Marquette University.

“That caused banks to become much more risk-averse, and so therefore, it became a little harder to get credit,” he said — especially for mid-sized companies.

At the same time, investors were looking to put their money into funds that got a decent yield, per Amir Sufi, a professor of finance at Chicago Booth. Private credit gave them that.

“From about 2010 to about 2024, the returns on private credit were truly impressive,” he said.

Sufi said we’re talking about 8% to 10%, and the borrowers didn’t default much. But the good vibes have changed lately.

Private credit firms made a ton of loans around 2021 and 2022, Sufi noted — when interest rates were low. They’re higher now, and a lot of those five-year-old loans are coming due soon.

“And when debt comes due, and the interest rate required to roll over the debt is much higher, then the borrowers are much more likely to default on the payment,” Sufi said.

Private credit firms have also done a ton of lending to software companies, and investors are worried that AI is coming for them.

But it’s hard to know exactly what’s going on at private credit firms because they don’t have to follow the same rules as traditional banks, said Lenore Palladino, an associate professor of economics and public policy at UMass Amherst.

“They're making a lot of loans, but without needing to disclose what is happening with the loans,” she said. “They don't necessarily have any reserves in case the loans go south, in case they're not paid back. And they aren't required to disclose or be supervised by federal regulators.”

All of this uncertainty in private credit — at a very uncertain time in the economy, more broadly — has investors trying to get their money out.

“We always have moments where, all of the sudden, if there's fear, then everyone will try to get out and be safe with their assets, be safe with their money,” Palladino said.

The thing is, a lot of private credit funds can limit how much investors can withdraw at any one time. And right now, a lot of them are throwing up those gates.