Private credit weathers the storm

PRIVATE credit managers appear to be moving beyond the market’s most turbulent period, although the industry’s next challenge is proving it can deliver steady returns without relying on the easy growth that fuelled its rapid expansion over the past few years.

A recent Bloomberg report highlighted that second-quarter results from many of the world’s largest publicly traded private credit funds suggest the sector is settling into a more measured phase, where portfolio quality, capital preservation and disciplined lending are taking precedence over aggressive expansion.

The findings come at an important juncture for the US$1.8 trillion private credit market, which earlier this year faced growing scrutiny as investors questioned whether rising defaults and valuation pressures could trigger a broader financial shock.

Instead, the latest earnings indicate that neither the most pessimistic nor the most optimistic predictions have played out, according to the newswire.

Business development companies (BDCs) – publicly listed investment vehicles that provide direct loans to companies – have offered investors one of the clearest snapshots of the industry’s health.

Unlike private credit funds that continue to face redemption queues from investors wanting to withdraw capital, listed BDCs operate with permanent pools of capital, allowing markets to focus more closely on the quality of their loan books and portfolio valuations.

That distinction has made their latest results closely watched as investors assess whether private credit’s rapid rise can continue without major disruption.

Across the sector, the common theme is less about chasing new lending opportunities and more about strengthening balance sheets.

Fund managers are trimming weaker investments, reducing exposure to non-performing loans where possible, managing leverage more conservatively and working hard to avoid dividend cuts that could further undermine investor confidence.

Those efforts appear to be reassuring markets.

Recovery in sight

Many listed BDCs have seen their share prices fall to multi-year lows earlier this year, as concerns mount over deteriorating credit quality and the impact of higher borrowing costs on corporate borrowers.

Following the latest earnings releases, however, several funds have recorded their strongest share price gains in months, suggesting investors are beginning to believe the worst may have passed, according to a Bloomberg report.

It points out that Blue Owl Capital is among those expressing greater confidence about market conditions.

“The investment backdrop has improved meaningfully from where we started the year,” Blue Owl co-president and head of credit Craig Packer says during the firm’s earnings call.

He also notes that “the second quarter was much more stable than the first”, reflecting improving market conditions after a volatile start to 2026.

Even so, the industry’s recovery remains uneven.

Many managers continue to report declines in net asset values as they reprice investments more conservatively, even as actual loan defaults remain broadly manageable.

The largest publicly traded BDC, Ares Capital Corp, reported that loans on non-accrual status — generally loans where borrowers have stopped making scheduled payments — rose 15% from the previous quarter and 26% from a year earlier.

However, troubled loans still represented only around 2.4% of the portfolio at cost, remaining below the fund’s long-term historical average since the global financial crisis.

Importantly for income-focused investors, Ares has maintained its quarterly dividend at 48 US cents, extending a payout level it has sustained for several years.

Elsewhere, Blackstone Secured Lending Fund has experienced one of the more challenging quarters.

The fund reports its largest decline in net asset value in six years as markdowns across parts of its portfolio weighed on performance. However, the deterioration is driven more by valuation adjustments than by a sharp increase in borrowers failing to repay loans.

BlackRock’s TCP Capital has chosen a more aggressive approach.

The manager announced plans to sell almost half of its loan portfolio into a continuation vehicle backed by secondaries specialist Pantheon. The transaction will transfer 48% of TCP Capital’s debt portfolio while allowing the fund to retain a small stake.

The move is expected to reduce the fund’s net asset value by around 10%, but also gives management an opportunity to reshape the portfolio while its board explores broader strategic options, including possible asset sales or corporate combinations.

Share buybacks

Blue Owl has also continued buying back shares across two of its listed private credit vehicles, as Bloomberg points out.

The repurchases are intended to support shareholder value at a time when many listed BDCs continue trading below their reported net asset values.

Although Blue Owl’s flagship vehicle has recorded a modest decline in net asset value and a slight increase in non-accrual loans, repayments significantly exceeded new lending during the quarter, highlighting a cautious approach to deploying capital.

Similar themes have emerged across the wider industry, according to Bloomberg.

Goldman Sachs BDC has reported slightly weaker asset values alongside a modest increase in troubled loans, although quarterly investment income improved significantly from the previous quarter.

FS KKR Capital, meanwhile, is showing signs that recent turnaround measures may be gaining traction.

Following KKR’s earlier US$300mil capital injection and share buyback programme, the fund reports lower non-accrual levels and narrower losses.

Oaktree Specialty Lending also has reduced the number of non-performing investments in its portfolio, while MidCap Financial Investment Corp has posted stronger-than-expected investment income alongside improving credit metrics.

Morgan Stanley Direct Lending Fund has maintained its dividend despite a slight decline in asset values, while Sixth Street Specialty Lending has kept its payout unchanged after reducing it earlier this year.

Carlyle Secured Lending, likewise, has held its dividend steady following a previous reduction, even as asset values edged lower.

The latest results suggest private credit managers are becoming more selective as the lending cycle matures.

Rather than expanding aggressively, many are focusing on preserving capital, improving portfolio quality and maintaining shareholder distributions where possible.

Broader changes

That shift also reflects broader changes across the private credit landscape.

Some of the industry’s largest firms have increasingly been directing capital towards higher-quality borrowers and larger financing transactions linked to artificial intelligence infrastructure, rather than concentrating solely on the traditional middle-market direct lending business that has fuelled much of the sector’s explosive growth.

Overall, the trend suggests that the next chapter for private credit may look different from the one that made it one of global finance’s fastest-growing asset classes.

Growth is unlikely to disappear, but it may increasingly be driven by larger, better-capitalised borrowers and more specialised financing opportunities, while managers devote greater attention to portfolio resilience after a year that tested confidence across the industry.