Why UK should pay attention to US private credit stress
A growing narrative is taking hold across the US private credit market; one that points to mounting structural pressures, deteriorating liquidity conditions and a shift in sentiment among both lenders and investors. Recent reporting from Reuters and related syndicated coverage paints a picture of a market that is not in crisis but undeniably under strain. This matters for UK market participants because many of the dynamics underpinning US stress are mirrored in the UK’s own private credit ecosystem.
US investors pulling back and funds feeling the strain
Several large US private credit managers are now facing double-digit redemption requests from their LP bases, at levels that some can no longer honour in full.
Reuters aligned reporting shows that major funds, including those run by BlackRock and Morgan Stanley, have imposed caps or limits on investor withdrawals to stem liquidity pressures, with Morgan Stanley restricting redemptions after investors sought to withdraw almost 11% of outstanding shares. Similarly, Blue Owl has halted redemptions in certain vehicles, signalling a more defensive posture across parts of the industry1.
At the same time, some managers have begun selling portions of their loan portfolios at discounts to generate liquidity. This is an uncomfortable but increasingly unavoidable consequence of mismatches between investor redemption demands and the inherent illiquidity of private credit.
Banks are repricing risk and pulling back
The spillover effects across Wall Street are becoming more pronounced. JPMorgan has marked down the value of certain loans to private credit funds, particularly those exposed to software credits, following recent market volatility and concerns around asset valuations. The bank has reportedly reassessed its financing portfolio “name by name and sector by sector”, putting downward marks on specific exposures where asset quality or sector conditions have deteriorated2.
These downgrades matter: they reduce available bank lending to private credit funds and signal broader caution among regulated financial institutions. Other US banks have also tightened lending to private credit providers as they reassess collateral values and exposure levels.
What’s driving the stress?
Four key forces are at play:
1. LPs are overweight in private markets due to falling public equity valuations
As public markets have fallen, many institutional portfolios have drifted above their target allocations to private assets. This ‘denominator effect’ forces LPs to rebalance by seeking redemptions from private credit and private equity vehicles at precisely the moment those funds can least absorb liquidity shocks.
2. PE exits have slowed
Lower exit volumes mean reduced distributions back to LPs, creating liquidity needs that compound the rebalancing pressures. Without a healthy exit environment, capital is not flowing back through the system.
3. Persistent concerns around asset valuations
Sentiment has been undermined by fears that some private credit portfolios may be overvalued, particularly where exposures relate to software companies facing possible business model disruption or borrowers experiencing earnings pressure. Syndicated Reuters coverage highlighted valuation concerns as a key factor denting investor confidence.
4. Growing amend and extend fatigue
While amend and extend waivers helped smooth the post-pandemic transition, repeated extensions, often without meaningful deleveraging, have left lenders increasingly wary. The patience for indefinite forbearance is thinning.
Why the UK should pay close attention
The UK private credit market shares many of the characteristics now contributing to stress in the US. Three elements are particularly noteworthy:
1. 2021-2022 leverage vintages based on peak earnings
These vintages often relied on earnings inflated by post-pandemic rebounds or temporary demand surges. As trading normalises, leverage multiples look stretched, pressuring covenant headroom, even in covenant-lite structures.
2. Increasing dependency on continuation vehicles
Continuation funds have softened the impact of muted M&A markets but they cannot fully substitute healthy exit activity. Where assets would previously have been sold into a functioning buy‑side market, they now linger under extended GP ownership.
3. Legacy covenant-lite structures
These delay the point of lender intervention, which can mask emerging stress but ultimately compress the window for constructive restructuring once problems crystallise.
What comes next?
The relevant question for the UK market is not whether US style stress will materialise but how and when. Based on early signals, expect more:
- Refinancing pressure, especially for borrowers with maturities in the next 18-24 months.
- Lender-led solutions, including debt for equity swaps, recapitalisations and, in some cases, enforcement processes.
- A more prolonged period of ‘extend and pretend’, alongside tougher lender negotiations as amendments become harder to secure.
For many UK borrowers, particularly those planning refinancings in the next 18 months, it may be prudent to bring timelines forward. Market capacity is likely to tighten, pricing may rise and credit committees will be increasingly discerning.
If you would like to discuss how deploy your borrowing or lending strategy in the current market situation, get in touch.
1 Reuters: https://www.reuters.com/business/blue-owl-sells-14-bln-debt-funds-pension-insurance-investors-2026-02-18/
2 Financial Times https://www.ft.com/content/389a0003-d8de-4afd-9de9-be6e9fc6888c
