Private credit in 2026: the new king of shadow…

Private credit, that charming euphemism for “direct loans to companies by non-bank funds”, that eldorado that grew like a mushroom after the rain of zero rates. In this early April 2026, the market is nearing or exceeding $2 trillion of assets under management (AUM), with Moody’s forecasting a tidy breach of the $2trn mark this year and a nice $4trn by 2030. Preqin even talks of $4.5trn if you count the semi-liquids and evergreen funds. The United States alone weighs between $1.3trn and $2.1trn depending on the source. It’s beautiful, it’s big, it’s… exactly the kind of size that makes regulators say “nothing to do with the shadow banking of 2008, promise”.

The yields? Still sexy on paper: directly originated first-lien loans should land around 8-8.5% in 2026, even after spread compression. Not bad for an “illiquid” asset that promised the illiquidity premium. Except that… the cracks are starting to show. And not just a little.

March-April 2026 will go down in the annals as the moment the “zero-loss fantasy” started to look its age. Redemption requests are exploding at BDCs (Business Development Companies). Several large managers had to put caps on withdrawals to avoid the haemorrhage. Bloomberg headlined at the end of March: “Why investors are rushing to exit the private credit market now”. The war in Iran, AI wrecking software business models, rates staying high… it all adds up. Result: PIK (payment-in-kind, in other words “we pay the interest in… additional debt”) has doubled, reaching 11% of the market at the end of 2025. Real defaults? Around 5.4% over 12 months in February 2026 per Fitch (slightly down, phew), but Morgan Stanley sees 8% as possible, UBS up to 15% in the worst AI scenario. Analysts are already talking of “shadow defaults”: maturity extensions, covenant waivers, quiet restructurings. The kind of thing you don’t see in the headlines but that hurts the portfolio.

The tastiest part? The banks, those nasty regulated players who had fled the middle-market, now lend $300 billion to private-credit funds (Moody’s). They’ve become the managers’ best friends… while starting to take back market share on leveraged loans. Translation: private credit filled the void left by post-2008 bank regulation, and now it’s getting so big that even the banks are coming back to nibble. It’s almost poetic.

On the investor side, retail and HNW individuals are rushing in via interval funds and semi-liquid structures (nearly a third of the US direct-lending market). The assets of semi-liquid credit funds jumped 22% in the first half of 2025 alone. Great: we democratise illiquidity just as redemptions become… complicated. Managers shout “historic opportunity” while institutional LPs eye the evergreen funds like liquidity saviours. But when the real crisis arrives, we all know how it ends: the queues to exit lengthen and the “quarterly look-throughs” suddenly become very interesting.

Innovation is everywhere: asset-backed finance (ABF) becomes the new engine of growth (consumer loans, data centers, infrastructure), private securitisation is exploding, NAV facilities and rated funds are multiplying. In short, we complexify to death to keep the yields up. It’s the financial equivalent of “we’ll just add a layer of derivatives, it’ll be fine”. Regulators are watching, of course. They talk of “more transparency” and opening to retail. We know the tune.

In 2026, the watchword of the real experts (those not selling LP interests): extreme selectivity. Performance dispersion is going to explode. Forget the easy beta of the 2022-2024 years. You’ll have to sort the managers who really know how to underwrite in a world where AI destroys the smallest cash-flow forecast. The “AI-disruption proof” sectors (or at least the less exposed ones) will win out. The rest? That will be the big reset everyone was talking about under their breath.

Private credit is not dead. Far from it. It remains the reference financing for the US middle-market and, increasingly, the European and Asian ones. But it is entering its “adult” phase: the one where the promises of risk-free return smash against the reality of cycles. The one where the opacity that made its charm suddenly becomes very inconvenient. The one where the $2trn of outstanding starts to look like a nice systemic leverage disguised as diversification. I mapped these transmission channels toward banks, insurers and crypto in detail in the silent contagion of private credit.

Welcome to 2026. Private credit is no longer the institutions’ well-kept little secret. It has become Wall Street’s big circus, with its BDCs shutting the windows and its managers explaining that “it’s just a temporary adjustment”. We applaud and keep an eye on the covenants. Because when PIK becomes the norm, it’s rarely a good sign.