What’s Going on With Private Credit?

Alarm bells are sounding in the world of private credit as investors withdraw billions of dollars from funds, squeezing managers to instill redemption limits and, for some analysts, giving rise to talk of a market meltdown.

For the middle-market M&A community, which has increased its reliance on private credit in recent years, such talk is concerning, to say the least.

But Leon A. Yel, a partner in the Commercial Finance practice group at law firm FBT Gibbons, says there’s no reason to panic.

Yel spoke with ACG to provide insight into what’s going on with private credit today, and what midmarket M&A professionals should know about how current direct lending stress could impact their deals in the future.

First Things First: What’s Going on With Private Credit?

Investors have already requested more than $10 billion worth of redemptions from private credit funds in the first quarter of the year, according to calculations released earlier this month by the Financial Times, which noted that figure is expected to rise.

Signs of trouble in private credit emerged months earlier, however, with the bankruptcies of two private credit-backed businesses last fall, raising concerns about widespread risk within the space. Those fears were heightened by an announcement in February from alternative asset manager Blue Owl Capital that it would sell $1.4 billion of its direct lending investments in order to provide liquidity to shareholders, effectively halting redemptions until that portion of its loan book could be sold.

Since, investors have raced to withdraw their investments from other private credit funds, causing dramatic declines in stock prices of some major firms, including Blue Owl, Blackstone, KKR, and others, and giving rise to talk of a panic, a meltdown, or even a repeat of 2008’s subprime mortgage crisis.

FBT Gibbons’ Yel offered a more measured take on current private credit market stressors, and why the market is experiencing this stress now.

“We need to understand, first of all, what’s changed, and why?” he explains. “We’ve seen significant growth over the past few years in the private credit arena. But what has really changed is the profile of investors.”

Most importantly, he says, there has been an expansion of high net worth retail investors in the asset class. According to Deloitte, U.S. retail investors’ allocation to private capital sat at about $1 billion in 2024, a figure expected to rise to $2.4 trillion by 2030.

Retail investors tend not to like long investment horizons. Still, private credit funds—which typically have three- to seven-year holding periods, to align with private equity time horizons—were eager to tap into the pool of retail capital. To appeal to these individual investors, private credit funds offered semi-liquid vehicles that allowed for earlier withdrawals. This created “a mismatch,” Yel says, between the private credit investment model and the incentives of individual investors.

“That’s what I think caused this little noise,” he says. “And spiking redemptions in private credit of course creates short-term hurdles for M&A.”

Spiking redemptions in private credit of course creates short-term hurdles for M&A.

Leon A. Yel

FBT Gibbons

What Does This Mean for M&A?

Private credit has been around for decades, but a recent combination of geopolitical instability, higher interest rates, tighter bank regulations, and a need among dealmakers to access capital more quickly to stay competitive drove dealmakers to turn from banks to direct lenders in a big way: Direct lenders financed 85% of leveraged buyouts in the U.S. in 2024, according to asset manager PGIM.

Current pressure in the private credit space could lead to reduced access to direct loans, says Yel, at least in the short term. According to the Financial Times, Goldman Sachs predicts private credit funds could see assets reduced by $45 billion to $70 billion in the next two years if retail investors continue to shy away from the asset class.

There is no crystal ball, but Yel offered a few possible outcomes for the longer term.

A shakeup in the private credit space could separate the winners from the losers. “Who will survive? The closed funds,” says Yel, referring to private credit funds with set lifespans that prohibit on-demand redemptions, further deterring individual investors.

He also predicts an opportunity for collaboration between private credit and traditional lenders. “The banks will likely be selectively stepping in and working more with private credit” as private credit grows more risk averse in the aftermath of current disruption, he says.

A recent blog post by Vanguard executives agreed, arguing that private credit is entering its third phase of evolution by strengthening relationships with banks, which are already increasingly financing the loans originated by private credit managers.

For borrowers, all of this could mean tighter loan agreements.  “We’re coming back to the world of covenants,” Yel says.

He adds that there will likely be “some adjustment” for dealmakers. “But I don’t think that alone will have a devastating effect” on M&A, he adds.

Should Middle-Market Dealmakers Panic?

The short answer, says Yel, is no.

“Any turmoil in the (private credit) market will have an effect on middle-market M&A,” he acknowledges. Dealmakers certainly should watch the market and be aware of what’s happening, particularly when dealing with open funds with heavy retail investor participation.

But industry experts are split on whether any risk in the private credit space represents a broader, more systemic problem. Everything from the war in Iran to AI valuations could influence the lending ecosystem, as highlighted by Citi CEO Jane Fraser in a March interview with Business Insider, and it is impossible to predict exactly how today’s market disruption will reverberate through middle-market M&A.

Still, Yel assures that, for middle-market dealmakers, “there is no panic. There is just elevated vigilance.”

Carolyn Vallejo is ACG’s Senior Editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.