Private Credit Default Rates Hit Five-Year High as Industry Optimism Struggles to Mask Growing Pressure
Claire Weston
Default rates at private-credit funds run by Ares, Blackstone, Blue Owl and Golub have climbed to their highest since at least 2021, surpassing levels seen during peak Fed tightening in 2023; with returns sliding from above 10% toward sub-7%, whether defaults spread to software — the sector's largest single exposure — will determine how deep this cycle cuts.
How bad are the default numbers?
Blue Owl's fund reported a 2.8% non-accrual rate in Q2 — a five-year high.
Ares, Golub and Blackstone funds hit five-year peaks as well. This means → current stress already exceeds the 2023 aggressive-rate-hike period, which had been considered the toughest recent credit test.
Borrowers placed on "performance deterioration watch lists" at Ares, Golub and KKR funds have also risen this year. In plain terms = it is not just loans already in trouble that are growing — the queue of loans heading for trouble is lengthening too.
What are managers saying — and does the data agree?
Blue Owl co-CEO Marc Lipschultz told investors on the earnings call that "credit health remains robust." Blackstone characterized market concerns as media hype.
Golub co-CEO David Golub struck a more balanced note: "Some media are saying 'the sky is falling,' some of my peers are saying 'this is nonsense, there are no problems.' Neither is accurate. We are clearly in a credit cycle — not a terrible one, but there will be winners and losers."
This reflects a visible gap between public messaging and fund-level data — managers have every incentive to project confidence, but a five-year high in defaults is hard to label "robust."
Which sectors have already blown up?
Non-accrual loans are concentrated in two areas: healthcare (e.g. dental-services provider Affordable Care) and companies hit by oil-price swings (e.g. plastic-film maker Loparex).
Both share a common trait: cash flows are acutely sensitive to external costs — healthcare depends on insurance reimbursement and patient payments, energy-linked firms depend on commodity prices. Pressure on either end directly erodes debt-service capacity.
Why is software the bigger hidden risk?
Software loans account for 20% or more of many private-credit fund portfolios — one of the heaviest single-sector weightings.
Analysts and fund managers are more worried that AI is beginning to disrupt traditional software companies, especially SaaS subscription models. This means → if clients shift to AI-native tools, the recurring-revenue assumption underpinning these loans could break — and private-credit pricing is built on exactly that assumption.
In plain terms = healthcare and energy defaults are known potholes; software is the untested but far larger risk exposure.
What does this mean for investors?
Fund returns have slid from above 10% to levels struggling to reach 7%, and redemption pressure is rising.
This reflects a fundamental mismatch: investors entered chasing high yields, but the very source of those yields — charging steep rates to heavily indebted borrowers — carries an inherent risk that defaults will erode returns when the cycle turns.
Whether defaults spread from healthcare and energy into software is the critical validation point for this cycle — if the software book holds, the stress stays manageable; if it does not, fund-level losses and redemptions could accelerate.
Content is for reference only, not financial advice.