Private credit raised nearly $100 billion in a quarter — and the scrutiny arrived with it

The money poured in

Private credit had a very good second quarter, by the measure that matters most to fund managers: fundraising. Capital raised approached $100 billion in the second quarter of 2026, according to Callan, with the four largest fund closes totalling about $38 billion. Direct lending financed about one-third of global buyouts exceeding $1 billion in 2026 through September 30. The asset class is no longer a niche; it is a major source of financing for the buyout market. m:…0541

The returns, however, did not keep pace with the fundraising. Private credit generated a pooled net internal rate of return of 1.6% in the second quarter, below the 1.9% public market equivalent return for leveraged loans. And the pricing suggests lenders are competing hard for deals: 86% of year-to-date direct lending deals in the third quarter priced below 550 basis points. Money is plentiful, and the price of lending it is falling. m:…0541

Where the cracks show

The headline default rate looks calm: the principal-weighted private credit default rate was 0.8% in the second quarter. The detail underneath is less calm. Companies with less than $100 million in earnings before interest, tax, depreciation and amortisation had a 3.0% principal-weighted default rate in the same quarter — nearly four times the overall rate. Software, which represents an estimated 20% of private credit lending, faces refinancing needs expected to accelerate in 2028. Public business development companies have already faced share price pressure over credit quality and valuations. m:…0541

Australia provided the cautionary tale. The Bathla Group collapsed with $3.4 billion in debt, in a private credit market estimated at $200 billion to $300 billion that has grown at a 21% rate over the last ten years, according to Challenger Investment Management's Stephen Martin, speaking on the NAB Morning Call podcast. Martin said construction and development lending has been hit by a perfect storm of rising interest rates, increasing input costs and unhelpful government policy — and that his own firm does not include construction and development lending in its flagship third-party funds. m:…6088

The regulator is now part of the story. Martin said the Australian Securities and Investments Commission is concerned that private credit practices in Australia leave investors in the dark and that standards are not being met across the industry, and he described the scrutiny as a necessary step for the industry's maturation. Offshore investors have begun to pull back or become more tentative regarding the Australian market over the last three months. Challenger's own defence is concentration on short, amortising loans: its private credit portfolio has a weighted average life of about two to three years. m:…6088

The AI debt nobody priced

The biggest concentration risk may not be in private credit at all, but in the investment-grade bond market that funds the AI buildout. Cambridge Associates reports that the concentration of AI-related names in the Bloomberg US Corporate Long AA Index increased from 21% to 40% between December 31, 2024, and September 30, 2026, and that 13% of the broader Bloomberg Long US Corporate Index is directly tied to hyperscalers or AI names. Companies are increasingly funding AI infrastructure buildouts through investment-grade corporate debt, and US defined benefit pension plans often use AA-rated corporate bond universes to set the discount rates used to value pension obligations. m:…4104

That creates a strange trade. AI-related bonds in the index currently yield 6.83%, against 6.27% for non-AI bonds — a pickup that currently helps pension funded status. But Cambridge Associates warns that downgrades of AI-related issuers could increase pension liabilities by 0.5% to more than 2.0%, depending on the methodology used. The average option-adjusted spread on the Bloomberg US Long Credit Index was just under 100 basis points as of September 30, 2026, against a long-run average of 166 basis points, so the market is pricing credit risk cheaply at exactly the moment concentration is rising. m:…4104

Adams Street Partners, in its 2027 private markets outlook, still calls core middle-market direct lending attractive, citing wider spreads, moderate leverage and stronger creditor protections. The same outlook says buyout returns in 2027 will depend more on revenue and earnings growth, sector expertise and operating capabilities than on leverage or multiple expansion. The message from both ends of the market is the same: the easy money from rising prices is gone, and the returns now have to come from the underlying businesses. m:…6347