The strain is spreading across various private credit portfolios, with some of the largest funds having already written down asset values and issued warnings about problematic loans, marking the sector's toughest test in nearly a decade.

A British media analysis, based on data from fixed-income data service provider Solve, found that the value of distressed loans held by some of the top private debt investors has risen to levels not seen since 2017, when the industry was grappling with the aftermath of an oil price slump. Among the 20 largest publicly traded Business Development Companies (BDCs, listed funds that invest in private credit loans), the median proportion of loans placed on non-accrual status relative to investment cost rose to 2.8% in the second quarter, up from 2% at the end of March. The classification of non-accrual status is a key signal of stress in the private credit industry, indicating that borrowers have either stopped repaying loans or the fund believes they may soon be unable to meet their debt obligations.

David Golub, co-CEO of private credit investment firm Golub Capital, told investors earlier this month that credit stress has significantly increased as the industry deals with rising defaults and distressed loans. "We are in a credit cycle," Golub said. "There was a time when others refused to acknowledge this. But I think now few people are still denying reality."

Fitch Ratings analysts warned last week that private credit default rates hit a new high in July. Another set of data from PitchBook LCD shows that leading publicly traded BDCs saw their portfolios shrink again in the second quarter, driven by asset impairment charges, combined with loan sales and repayments exceeding new deal commitments. This quarter, funds such as KKR, Blue Owl's publicly listed vehicle, and MidCap Financial, operated by Apollo Global Management, all experienced loan repayments exceeding new loan origination volumes. KKR executives attributed this to limited deal opportunities and the proactive exit of some loans by institutions. The company's publicly listed fund, FS KKR Capital Group, disclosed that its non-accrual loans represented 7.1% of its loan portfolio in the second quarter, a slight improvement from the previous quarter but still well above the industry average.

These figures highlight the challenges facing the private investment industry, which had bet heavily on private credit as a core growth engine, managing funds for insurance companies, retirees, and high-net-worth individuals. The rapid rise of these investment vehicles, along with the lucrative management fees they generate, had driven the valuations of firms like Blue Owl, Ares Management, Blackstone, Apollo, and KKR significantly higher. However, as private credit yields have fallen sharply, massive capital outflows have weighed on the stock prices of these institutions. Industry leaders have acknowledged that bankruptcies and debt restructurings are reverting to long-term averages after an extended period of low default rates.

Armen Panossian, co-CEO of the credit division at Oaktree Capital, stated, "We are conserving capital, focusing on a more defensive, risk-averse posture overall. We hope to seize investment opportunities in a more volatile market environment going forward... The hidden dangers are already there beneath the surface."