The private-credit boom is entering a more uncomfortable phase: capital is still arriving, but investors are paying much closer attention to what the loans underneath the yield are actually worth.
That contradiction was highlighted this week when Tether and Fasanara Capital launched StableFund, a new private-credit vehicle anchored by $400 million of co-investment and targeting up to $3 billion in additional institutional capital. The fund will focus on financing small and medium-sized businesses through short-duration, asset-backed strategies.
The timing matters. Private credit continues to attract capital even as troubled loans, portfolio markdowns, redemption requests and borrower stress have become more visible. The result is a private credit reset: not a collapse of the asset class, but a shift from rapid growth toward greater scrutiny of credit quality, valuation and risk-adjusted returns.
Private Credit Is Still Growing But Credit Risk Is Harder to Ignore
Private credit has expanded from a niche lending strategy into a major part of private markets. PwC estimates that global private credit now manages more than $2 trillion and could reach $3.4 trillion by 2030. Its 2026 survey describes the market as entering its first significant credit-cycle test, with competition, defaults, redemptions and pressure on returns becoming more important.
That growth was driven by several structural forces.
Banks retreated from parts of leveraged lending, while private-equity sponsors and middle-market companies wanted flexible financing. Institutional investors, meanwhile, were attracted by floating-rate loans and the prospect of higher income than traditional fixed-income assets.
The problem is that the same environment that helped private credit expand can eventually expose weaknesses.
Higher borrowing costs increase pressure on highly leveraged borrowers. Competition among lenders can compress spreads and weaken deal terms. And when more capital chases similar borrowers, underwriting discipline becomes increasingly important.
Growth in assets under management, therefore, is not the same thing as growth in investment performance.
That distinction sits at the heart of the private credit reset.
From Yield to Risk-Adjusted Return
For years, the private-credit proposition was relatively straightforward: provide loans to businesses, collect attractive interest income and accept less liquidity in exchange for potentially higher returns.
But income is only one part of the equation.
A lender can continue receiving interest while a loan’s underlying value declines. A borrower can enter financial distress without immediately recording a conventional default. And a loan that eventually defaults can produce very different outcomes depending on its collateral, seniority, documentation and recovery value.
That makes the relevant equation closer to:
Income + Change in Principal Value = Total Return
The distinction is becoming more important because recent evidence shows that portfolio marks can weaken before a formal default occurs.
UBS reported that direct-lending performance softened in the first quarter of 2026 as interest income was offset by markdowns in underlying loan portfolios. It said the vast majority of those losses were unrealized, with software and syndicated-loan exposures among the areas more affected.
This is why the private credit reset is fundamentally about risk-adjusted yield, not simply headline yield.
Defaults Are Rising But the Numbers Need Context
Private-credit stress is increasing, but there is no single definitive default rate for the market.
Financial Times analysis found that troubled private-credit loans had reached their highest level since 2017. Among business development companies, median non-accruals reached 2.8% in the second quarter of 2026.
Houlihan Lokey’s latest Private Credit DataBank illustrates why the underlying numbers require careful interpretation. For borrowers with less than $100 million of EBITDA, second-quarter default rates were 3.0% on a size-weighted basis and 3.6% by count. Yet defaults across the full market remained below 1% when measured against outstanding loan principal because larger borrowers were performing better.
These statistics are not contradictory.
They use different universes and weighting methods.
Default measurement can also differ depending on whether analysts include technical defaults, payment defaults, restructurings or other forms of financial distress.
PIMCO has highlighted another complication: direct-lending distress can be harder to observe than public-market defaults because financial problems are sometimes resolved through less visible restructuring mechanisms. Its research indicates that financial distress in direct lending has risen materially since 2022, although the deterioration has recently begun to plateau.
The lesson is simple: default frequency alone does not determine credit losses.
A Loan Can Lose Value Before It Defaults
Private credit does not have the same continuous price discovery as publicly traded bonds.
Managers generally value private loans using models, borrower financial performance, comparable transactions, market spreads and other inputs. That can produce a smoother reported valuation path than a liquid public market.
But smoothing does not eliminate economic risk.
Reuters’ analysis of regulatory filings from 44 U.S. BDCs found that the combined fair value of investments was $92.88 billion at June 30, 2026, compared with $95.19 billion of reported cost or amortized cost. The analysis identified wider spreads and financial stress among some borrowers, particularly in software.
Houlihan Lokey likewise found that 7% of loans across its dataset were priced below 90% of par in the second quarter, more than twice the historical average. Among borrowers with $10 million to $20 million of EBITDA, the proportion reached 12%, compared with roughly 1% in 2023.
That distinction matters.
A loan can lose value before it defaults.
For investors, valuation discipline therefore becomes as important as default statistics.
Why Recoveries May Matter More Than Defaults
The ultimate economics of lending are determined not only by whether a borrower defaults, but by what happens afterward.
Consider two portfolios with the same number of defaults. One manager may have senior secured loans, strong covenants, valuable collateral and experienced restructuring teams. Another may have weaker documentation, higher leverage and poorer recovery prospects.
Their losses can be very different.
A useful framework is:
Credit Loss ≈ Default Frequency × Loss Given Default
That is why institutional investors increasingly need to examine borrower leverage, interest coverage, collateral, guarantees, covenant protection and loan documentation.
The private credit reset is therefore moving the conversation from “How high is the coupon?” to “How much capital is protected if the borrower fails?”
The Software Problem
Software has become one of the clearest areas where this distinction matters.
Some private-credit portfolios have meaningful exposure to software borrowers whose valuations and business models are being reassessed as artificial intelligence changes competitive dynamics.
UBS reported that managers with larger software exposures tended to underperform in the first quarter as loan marks weakened. At the same time, UBS noted that software default rates remained low and that operating performance for most businesses remained strong.
That is an important distinction.
AI can create substantial opportunities for software companies while simultaneously creating risks for businesses whose products become easier to replace, whose growth assumptions weaken or whose valuations compress.
Credit investors therefore cannot assess software exposure simply by asking whether the sector itself is attractive.
They must ask whether the individual borrower’s cash flow can withstand technological disruption.
Tether’s $400 Million Private-Credit Bet
Tether’s StableFund provides a striking example of private credit’s continued expansion.
Announced on September 9, the vehicle is anchored by $400 million of co-investment from Tether and Fasanara Capital and targets as much as $3 billion in third-party institutional capital. Fasanara will manage the strategy and deploy capital through its fintech lending network, focusing on short-duration, asset-backed credit for small and medium-sized businesses.
Tether says the fund is designed to address financing gaps affecting smaller businesses. The structure also introduces stablecoin infrastructure into private lending, illustrating how the boundaries between digital assets and private markets continue to converge.
But the launch should not be interpreted as evidence that private credit is low-risk.
Its significance is almost the opposite.
Capital is still seeking exposure to private lending even while existing portfolios are being scrutinized more closely.
That suggests the underlying demand for private credit remains strong. Banks do not fill every financing need, smaller businesses still require capital, and institutional investors continue to seek alternative sources of income.
The private credit reset is therefore not necessarily a retreat from lending.
It is a repricing of what investors expect to receive for taking the risk.
Liquidity Is Now Part of the Investment Case
Private credit’s illiquidity has historically been part of its appeal. Loans are negotiated privately and are generally intended to be held rather than traded continuously.
But that structure becomes more important when investors want their money back.
Blackstone’s BCRED reported approximately $4.3 billion of repurchase requests in the third quarter, equivalent to about 10% of shares outstanding. Its quarterly program allows repurchases of up to 5% of shares outstanding, meaning requests above that level cannot simply be fulfilled immediately. Blackstone reported that the fund had a backlog of unfulfilled requests from the prior quarter.
This does not mean the fund is failing. In the same filing, BCRED reported capital inflows, substantial available liquidity and loan repayments that exceeded shares repurchased during the quarter.
But the episode demonstrates why fund liquidity and asset liquidity are different things.
Illiquidity can prevent forced selling during a downturn.
It can also prevent investors from exiting quickly when confidence weakens.
Secondaries Could Become More Important
That tension is creating opportunities for private-credit secondary markets.
The private-credit secondary market reached approximately $20.4 billion in the first half of 2026, according to reporting cited by The Wall Street Journal. HarbourVest has raised $2.4 billion for a new private-credit secondary strategy and has already deployed capital across several transactions.
Secondaries can provide investors with liquidity and give managers another mechanism for restructuring portfolios.
They also perform another important function: price discovery.
When a private-credit position changes hands at a discount, the transaction can reveal what another investor is actually willing to pay for an asset that may previously have carried a higher internal valuation.
That makes secondary pricing an increasingly relevant signal during the private credit reset.
The Manager-Selection Problem
As the market matures, investors may need to treat private credit less as a single asset class and more as a collection of manager-specific portfolios.
The important questions increasingly include:
- How much leverage does the borrower carry?
- How strong is interest coverage?
- What collateral protects the lender?
- How restrictive are the covenants?
- How concentrated is the portfolio?
- How exposed is it to refinancing risk?
- How are loans valued?
- What happens after a default?
- What has the manager demonstrated in previous workouts?
- How much liquidity does the fund actually provide investors?
This is where the private credit reset could create the greatest differentiation.
The competitive advantage may shift from capital raising toward credit selection, documentation, valuation discipline and workout capability.
The New Private-Credit Investment Test
The next phase of private credit is unlikely to be defined simply by how quickly the asset class grows.
It will be defined by how managers perform when borrowers become more difficult.
That means investors should increasingly distinguish between:
Private Credit Growth: how much capital enters the asset class.
Private Credit Performance: what investors actually earn.
Credit Quality: how healthy the underlying borrowers are.
Portfolio Valuation: what those loans are currently estimated to be worth.
Investor Liquidity: how easily investors can access their capital.
These are related, but they are not interchangeable.
The deeper private credit reset thesis is therefore not that private credit is becoming dangerous. It is that the market is discovering the difference between lending at attractive yields and earning attractive risk-adjusted returns.
During the expansion phase, investors could focus heavily on yield, floating rates and AUM growth.
The next phase demands greater attention to underwriting, documentation, valuation, recovery and liquidity.
Conclusion: From Growth to Credit Discipline
Private credit is not experiencing a uniform collapse. Most borrowers are not in default, and large parts of the market continue to perform.
But the easy phase of expansion may be ending.
More capital creates more competition. Competition can pressure deal economics. Higher borrowing costs can expose weaker borrowers. Borrower stress can lead to markdowns, non-accruals and defaults. And when investors begin questioning valuations or liquidity, manager selection becomes more important.
Tether’s $400 million StableFund shows that demand for private credit remains powerful. The simultaneous rise in troubled loans, markdowns and redemption pressure shows why that demand can no longer be evaluated through headline yields alone.
The private credit reset is ultimately a transition from an asset class defined primarily by growth and yield toward one increasingly defined by credit selection, risk management, recovery, liquidity and manager quality.
The next phase of private credit may belong not to the managers who lend the most, but to those who can prove they understand what happens when the cycle turns against the borrower.
Frequently Asked Questions
What is the private credit reset?
The private credit reset is the market’s shift from emphasizing rapid asset growth and attractive yields toward greater scrutiny of underwriting, borrower quality, valuations, recoveries and liquidity.
Why are investors becoming more cautious about direct lending?
Higher borrowing costs, borrower stress, portfolio markdowns, software-sector concerns and redemption pressure have made investors more focused on the risk behind private-credit yields.
Are private-credit defaults increasing?
Stress has increased, but the answer depends on the borrower universe and methodology. Houlihan Lokey reported 3.0% size-weighted and 3.6% count-based defaults among borrowers below $100 million of EBITDA in Q2 2026, while defaults across the broader market remained below 1% of outstanding principal.
Why do private-credit loan markdowns matter?
A markdown can indicate that the estimated economic value of a loan has fallen even when the borrower has not formally defaulted. It can therefore affect investor returns before a realized credit loss occurs.
What is Tether’s $400 million private-credit fund?
StableFund is an evergreen private-credit vehicle launched by Tether and Fasanara Capital with $400 million of sponsor co-investment and a target of up to $3 billion in third-party institutional capital. It focuses on short-duration, asset-backed lending to small and medium-sized businesses.
What should investors look for in private-credit funds?
Investors should examine borrower leverage, interest coverage, covenants, collateral, sector concentration, refinancing exposure, valuation methodology, recovery experience and fund liquidity rather than relying on headline yield alone.
Investment Disclaimer
This article provides general informational content and does not constitute financial, investment, legal, tax or credit advice.
Private credit investments can involve substantial risks, including borrower defaults, loss of principal, illiquidity, valuation uncertainty, leverage, refinancing risk, concentration risk and manager-specific risk.
Past performance does not guarantee future results. Investors should conduct independent due diligence and consult qualified professional advisers before making investment decisions.
Ana Goldenberg is a Contributing Editor at Alt Finances with a career rooted in the high-stakes worlds of banking and private placements. From profiling global philanthropists to managing complex financial operations at Wells Fargo, she bridges the gap between editorial storytelling and disciplined financial expertise.
