This insight is provided by Portfolio Management Research (PMR), the leading source of peer-reviewed investment research.
Executive summary
Private credit entered 2026 with a credibility question at its center, namely: can managers prove the values sitting inside their portfolios?
Residual Risk: Benchmarking the Boom in Private Credit, a paper recently published in Portfolio Management Research (PMR), argues that, across nearly all 2015–2020 private credit vintages, a significant share of total value to paid-in is composed of residual value rather than realized cash returns. This finding goes to the heart of the current debate. Private credit’s appeal has partly rested on stable reported returns. But if performance remains heavily dependent on manager marks, investors need to know whether that stability reflects genuine credit resilience or valuation lag.
Private credit is no longer a niche alternative. We tracked $240 billion of private credit final closes in 2025, up about 10% from 2024, while noting that direct lending’s share of fundraising fell sharply as specialty finance, secondaries, fund finance and asset-based finance gained ground. Evergreen private credit funds also surpassed $700 billion in assets under management.
But scale has brought scrutiny. The argument has long since moved on from whether private credit can grow – clearly, it can. Instead, the question hovering over the asset class is whether growth has been built on the things that last, such as durable underwriting, realistic valuations and adequate liquidity.
Today, higher-for-longer rates are bearing down on borrowers with floating-rate debt. Non-traded business development company (BDC) redemptions have exposed liquidity mismatch in wealth-facing vehicles.
It could be argued that private credit should now be monitored less like a static income allocation and more like a live credit book. That means looking beyond headline yield to factors such as valuation quality, cash interest coverage, PIK dependency, sector concentration, and fund liquidity.
The marks are now the issue
A critical question as of May 2026 is whether the reported values of private credit loans are moving quickly enough to reflect the risk they carry.
Authors of the PMR research mentioned previously – Hooke, Hu, and Imerman – find that a significant share of reported private credit fund value remains tied to residual value rather than realized distributions. This does not mean private credit marks are wrong, but it does mean they need to be tested. Low reported volatility can smooth portfolio returns, reduce public-market noise and provide a more stable-looking income stream. But low volatility can mean two different things: genuine credit resilience or valuation lag.
A loan that is marked steadily through a period of borrower stress may be resilient. Or it may simply be slow to reflect deteriorating fundamentals. Portfolio managers and risk officers would do well to ask not only whether a NAV has moved, but whether it has moved enough, and early enough.
A more complex market
Private credit’s rise until recently was simple to explain – a mix of banks pulling back after the global financial crisis, borrowers needing capital, and institutional investors hunting yield. While this story is still relevant, it is yet incomplete.
Direct lending remains central, but new growth is also coming from adjacent areas, including asset-backed finance, specialty finance, secondaries, fund finance, infrastructure debt and real estate credit. This expansion is useful for borrowers because private credit offers advantages in speed and in flexible structures. It is also useful for allocators. Many portfolios still need floating-rate income, diversification and access to less intermediated lending.
Yet the same growth has changed the risk profile. Private credit is no longer a simple yield product. It has become a refinancing channel, a sponsor finance tool, a private wealth product and, more and more often, a substitute for parts of the banking system.
Liquidity comes at a price
The private wealth channel has made liquidity design more important. Non-traded BDCs and interval funds have been marketed to investors as “semi-liquid” vehicles, typically allowing quarterly share repurchases of up to 5% of net asset value.
With redemptions from the largest non-traded BDCs averaging 12.1% in Q1, and remaining elevated in Q2, most managers have opted to gate withdrawals and cash out investors on a pro rata basis.
While redemption gates are – so far – functioning as designed, they have highlighted the potential pitfalls of investing in what are ultimately illiquid underlying assets.
Investors who thought they owned a yield product are being reminded that they also own an illiquidity bargain.
Somefun, Blanchoz and Leote de Carvalho make this point clearly in the PMR paper Navigating the Private Debt Landscape: Insights and New Fund Formats. Open-end private debt funds can create a first-mover advantage if redeeming investors exit at NAV while remaining investors bear the transaction costs of selling illiquid loans. Swing pricing and gating mechanisms are therefore not incidental features but central to the product design.
Borrower stress is rising, but not evenly
The next test is borrower quality. Our 2026 private credit outlook notes that while headline default rates have remained relatively low, stress looks more pronounced once selective defaults and liability management exercises are included. Its 2025 private credit trends analysis also points to falling interest coverage ratios and a notable rise in the use of payment-in-kind facilities, both signs that some borrowers are struggling with heavier interest burdens.
That does not mean the whole market is breaking. Private credit is not one market. After all, senior secured lending is different from mezzanine and sponsored lending is different from non-sponsored. Additionally, asset-backed finance is different from recurring-revenue software lending.
The problem is that investors often see the headline yield before they see the underwriting file. Private credit loans typically have features that can help lenders in stress: negotiated covenants, security packages, access to borrower information and the ability to engage early. Somefun et al. note that covenant breaches can provide early warnings and allow lenders to engage with borrowers before the situation deteriorates further.
But the question is whether these tools remain strong enough after years of capital inflows, spread compression and competition for sponsor deals.
The best managers will disclose more, not less
Private credit still has a strong case. Floating-rate income remains useful for investors, while certainty and speed remain valuable to borrowers.
The market is also becoming more sophisticated, with data-driven underwriting and AI-enabled monitoring emerging as competitive differentiators in origination, surveillance and early warning detection, according to Frank Fabozzi in his PMR article The Strategic Evolution of Private Debt: Navigating ESG, Inclusion, and Resilience in a Volatile World.
But the risk is that the market grows faster than its reporting standards. The test for private credit goes beyond defaults, which are always likely to happen in credit. Whether managers can prove the marks, explain the liquidity, show the cash and demonstrate control when borrowers weaken – that is the transparency test now facing private credit.
