Private-Credit Investors Are Cashing Out in Droves

Redemptions by individual investors in funds soared at end of 2025 after performance declined, reviving questions about suitability

https://www.wsj.com/finance/investing/private-credit-investo...

After every crisis or crash, the financial engineers always seem to find a new way to put us all at risk.

   > In the November collapse of home improvement firm Renovo, for instance, BlackRock and other private lenders deemed its debt to be worth 100 cents on the dollar until shortly before marking it down to zero.

This is “jump to default” risk and it’s quite hard to estimate even for people who are in these markets and have all the information. For people who are unfamiliar with debt markets, the situation is not as suprising as it sounds. Imagine I have a company that makes auto loans. Typically these will be financed by me holding an “equity tranche” which is the riskiest piece of the loan pool and then selling off the rest so I have capital to make more loans.

The piece that I sell off is 100% money good until my equity tranche is wiped out, so prior to that point there is little to suggest it’s not worth face value (100). However there is a real problem with that, which is observability. We don’t get to see the creditworthiness of a loan on a tick by tick basis like we see the price of a stock. We see John Does 1-100 were all current on their car loan up to December, and then nothing until the next month when the next payment is due. This means they can jump straight from being current to being totally delinquent in one or two data points. This makes it very hard to accurately estimate default correlation. Like say your loan portfolio is in a particular metro area. You could easily have 50 of those John Does working in the same industry and their loans live or die together. If one is current they’re all current but if one defaults (because a local factory has shut down or something) all of them suddenly default together. The holders of the debt don’t see a gradual decline and there is no data for them to estimate how the default of one loan affects the default of another. They just go to bed one day and the debt is worth 100 and the next day it’s completely wiped out.

The protection against this is supposed to be the spreads on the loans and the capital of the NBFI that issued the loans, but they seem to have been sailing pretty close to the wind. Moves to cap consumer credit rates will probably make this situation worse because responsible players will be driven out of the market (because they can’t price consumer loans in an economically sane way given the level of risk) so only unscrupulous and/or incompetent players will be left.