Private credit has been investors’ choice of Wall Street for years, drawing in everyone from pension funds to retirees. This is due to the promise of higher yields than bonds, steady income, and portfolio diversification all wrapped into one neat package.
However, behind those glossy marketing brochures, cracks have been forming for months, and redemption requests have surged at some of the biggest funds in the space. Major firms like Apollo, Blackstone, and Blue Owl have scrambled to restrict investor withdrawals in recent weeks.
Charles Schwab is weighing in with a detailed assessment that should make you stop and reconsider what you own. Here’s what Schwab wants you to understand before you make your next move.
Schwab says this is a liquidity problem, not a solvency crisis
The most important distinction in Schwab’s analysis is the difference between liquidity stress and systemic solvency risk. These two concepts sound similar, but they carry vastly different consequences for your investments going forward.
Liquidity refers to how easily you can access your cash from a fund. Solvency refers to whether the fund’s underlying loans will be repaid by borrowers over time, according to Schwab.
Right now, the core issue is that too many investors are simultaneously asking for their money back. Funds are using pro rata redemptions and quarterly caps to manage outflows without dumping assets at fire-sale prices.
Schwab currently views direct lending as facing a “reasonably large-scale liquidity issue rather than a systemic solvency issue, though conditions may evolve.” This means things could get worse if the economy deteriorates.
Redemptions are surging across the private credit landscape
The wave of withdrawals hitting private credit funds is no longer hypothetical. It is happening now across multiple firms and fund structures.
Apollo Global Management capped redemptions on its flagship $25 billion Apollo Debt Solutions BDC after withdrawal requests hit 11.2% of outstanding shares. The firm honored roughly 45% of total requests and deferred the rest to future quarters, according to an SEC filing.
Blackstone lifted its quarterly redemption cap on the $82 billion BCRED fund from the standard 5% to 7.9% to accommodate rising investor demand. The fund posted its first monthly loss in more than three years in February 2026, declining 0.4% for the month, Reuters reported.
Cliffwater, Morgan Stanley, and Blue Owl have also moved to restrict investor withdrawals across their private credit vehicles in recent weeks. BDC redemptions among funds with aggregate net asset values over $1 billion rose by 217% quarter over quarter, according to industry data.
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How redemption caps work when your money is locked
If you own shares in a non-traded BDC or interval fund, your ability to cash out depends on the fund’s specific redemption terms. Most of these vehicles allow investors to redeem only about 5% of net asset value each quarter.
When too many people request redemptions at once, the fund prorates the payouts based on your ownership stake. You might request $50,000 back and receive only $22,500, with the rest pushed to the following quarter or beyond.
“Private credit is lightly regulated, less transparent, opaque, and it’s growing really fast, which doesn’t necessarily mean there’s a problem in the financial system, but it is a necessary condition for one,” Moody’s Analytics Chief Economist Mark Zandi told CNBC News.
Schwab emphasizes that pro-rata redemptions are not necessarily a red flag on their own. They are a built-in liquidity management tool that funds use to avoid dumping private loans at steep discounts on the secondary market.
The real danger comes if redemption requests remain elevated for multiple consecutive quarters, potentially forcing fund managers to suspend withdrawals entirely. That scenario would leave your capital trapped with no clear timeline for access.
Older private credit funds carry the load from the low-rate era
Not every private credit fund faces the same level of risk right now. Schwab makes a critical distinction between funds that originated loans before 2022 and those that began lending after interest rates rose significantly.
Funds with a larger share of loans from the low-rate era are more likely to hold stressed assets today. Those borrowers took on debt when rates were near zero and now face crushing interest payments under the Federal Reserve’s higher-rate policy.
Direct lending loans typically carry floating interest rates, which means borrower costs rise alongside short-term rates. That feature protects you as an investor during rate hikes, but it can also put the borrower in trouble if payments become unsustainable.
Newer funds with loans originated after 2023 were underwritten at higher rates and generally reflect tighter lending standards. Schwab suggests these portfolios are better positioned to absorb the current stress cycle without significant impairment.
Software sector exposure is an issue in many private credit portfolios
One of the most under-appreciated risks in private credit right now sits in the software and SaaS sector. Companies in this space account for roughly 20% to 25% of private credit deals, according to 9fin data.
These software companies were once considered safe borrowers because they generated sticky, recurring subscription revenue. But the rapid advancement of artificial intelligence has changed the calculus for many of these businesses.
AI tools from companies like Anthropic and OpenAI now replicate complex SaaS functions at a fraction of the cost, threatening the long-term earnings power of software borrowers. UBS Group published an aggressive disruption scenario projecting that private credit defaults could surge to 13% in 2026 if AI adoption accelerates.
Sharp markdowns of individual loans and significant pricing discrepancies between firms have added fuel to the anxiety. Schwab notes that these dynamics have intensified scrutiny of underwriting assumptions and private asset valuations across the industry.
How to check your fund’s sector concentration
If you hold a private credit fund, pull up the most recent quarterly report and look at the sector breakdown of the underlying loans. You want to know exactly how much of the portfolio is tied to software or technology companies.
Blue Owl and several other major BDCs have significant exposure to SaaS lending, which has become one of the most vulnerable segments of private credit in the current environment.
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A record $25 billion of speculative-rated software loans were trading below 80 cents on the dollar as of early 2026, PitchBook analysis found. That kind of markdown tells you borrower stress is already priced into the public markets, even if your fund’s NAV has not yet reflected it.
Concentration in any single sector can magnify losses in a downturn, and you may not have time to react before the fund restricts your ability to redeem shares.
A recession or rate spike could turn a liquidity squeeze into a solvency crisis
Schwab’s base case is that this remains a liquidity problem, not a solvency emergency. But the firm makes clear that two specific scenarios could push private credit into much more dangerous territory for ordinary investors.
The first scenario is a full-blown recession. If consumer spending drops sharply and corporate revenues decline, more mid-market borrowers will struggle to make loan payments. Direct lending loans are generally made to smaller companies with less financial cushion than their larger counterparts, Schwab warns.
The second scenario involves persistently higher inflation forcing the Federal Reserve to raise interest rates further. That would increase borrowing costs for companies already stretched thin, potentially triggering a wave of defaults across private credit portfolios.
If either of these situations materializes, the financial outcome for direct lending could be significantly worse than for traditional public fixed income. Schwab specifically warns that private credit investors could face larger losses than holders of conventional bonds in a severe downturn.
Oil prices and the Iran conflict add another layer of risk
Schwab also flags the geopolitical situation as a potential catalyst. The firm notes that the economy showed resilience before the Iran conflict, aided by AI infrastructure spending and a rebound in private payrolls.
However, if persistently higher oil prices trigger both a spending slowdown and a labor market shock, late-cycle dynamics could accelerate. Companies have not resorted to widespread layoffs yet, but Schwab says it is closely monitoring whether revenues are under pressure due to reduced consumer spending.
Related: No end in sight as Iran war fuels surge in oil prices
For you, as an investor, this means the current private credit stress could worsen before it improves. Your risk exposure depends on the specific fund you own, the vintage of its loans, and your personal timeline for needing that capital.
The interconnection between geopolitical events and borrower defaults is something that most private credit marketing materials never mention, but it could determine whether your fund survives this cycle intact.
5 questions every private credit investor should answer right now
Schwab stops short of telling you to sell or hold your private credit positions, and that’s intentional. The right decision depends entirely on your personal circumstances, timeline, and tolerance for reduced liquidity going forward.
But the firm’s analysis strongly suggests that you should actively evaluate your exposure rather than wait for headlines to tell you what to do. Here are the essential questions to ask yourself and your financial advisor immediately:
- What percentage of your portfolio is allocated to private credit, BDCs, or alternative lending strategies? If it’s a large portion, your overall portfolio liquidity may be more constrained than you realize during a downturn.
- Do your fund holdings have meaningful exposure to software-sector loans vulnerable to AI-driven disruption? Check the latest quarterly filing and review the sector allocation breakdown for technology- or SaaS-related lending.
- What are the specific redemption terms, including quarterly caps, lock-up periods, and prorating policies? Understanding these terms now prevents unpleasant surprises when you need access to your capital in the future.
- Has the net asset value of your holdings declined relative to peer funds over the past two or three quarters? Consistent underperformance relative to comparable funds is an early warning sign of deeper portfolio problems ahead.
- Can you afford to have this capital locked up for 12 to 24 months if redemptions are suspended? If the answer is no, you need to seriously evaluate whether staying in the fund makes sense for your financial situation.
Schwab does not view a fund’s use of pro-rata redemptions alone as a reason to rush for the exits, assuming you can tolerate reduced liquidity and still believe in the quality of the underlying loans.
But the firm is clear that you should actively monitor your liquidity position and overall risk capacity when deciding whether to hold your position or submit a redemption notice to your fund.
The private credit market has grown fivefold since the financial crisis
To understand why this moment matters, you need to appreciate how massive the private credit market has become. The asset class totaled $1.34 trillion in the United States alone and nearly $2 trillion globally by mid-2024, according to the Federal Reserve.
That growth represents roughly a fivefold increase since 2009, driven by post-crisis banking regulations that pushed mid-market lending away from traditional banks and toward private lenders. Morgan Stanley projects the total market could reach $5 trillion by 2029.
Much of the recent growth has come from retail investors. The U.S. retail allocation to private credit currently stands at roughly $100 billion and is projected to grow at nearly 80% annually, reaching $2.4 trillion by 2030,according to Wellington Management.
That retail explosion is exactly why Schwab’s warning matters. These are not just institutional investors with long time horizons and deep risk tolerance. These are ordinary people with retirement accounts, college savings, and household cash needs.
Regulation has not kept pace with the growth
Private credit funds operate without the same regulatory oversight that applies to traditional banks. There are no prudential examinations, no standardized risk assessments, and limited transparency requirements for most vehicles.
The private credit industry is “lightly regulated, less transparent, opaque, and it’s growing really fast,” which doesn’t necessarily mean there’s a problem, but it is a necessary condition for one, Moody’s Analytics chief economist Mark Zandi said in a recent interview with CNBC.
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The Securities and Exchange Commission has signaled it is closely monitoring the gating mechanisms of non-traded BDCs. But until stronger oversight is in place, the burden of due diligence falls squarely on you as the investor.
The Trump administration’s 2025 executive order allowing 401(k) plans to invest in alternative assets, including private credit, only increases the urgency. More retail capital flowing into less-liquid vehicles creates a structural mismatch that could amplify the next liquidity crunch.
The bottom line for your portfolio
Schwab’s message is measured but unmistakable. Private credit is facing real stress, the risks are concentrated in specific fund vintages and sectors, and a worsening economy could turn today’s liquidity squeeze into something much more painful.
You do not need to panic, but you do need to act with your eyes wide open. Review your holdings, understand your redemption terms, check your sector exposure, and have an honest conversation with your financial advisor about your liquidity needs.
If you can tolerate reduced access to your capital and believe in the quality of the underlying loans, staying put may be reasonable. But if you need that money in the next year or two, now is the time to evaluate your options.
The private credit market will not collapse overnight. But the era of treating it like a risk-free yield machine is officially over, and Schwab just made that point as plainly as any major financial institution has.
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