Private credit funds have boomed in popularity in recent years as high-net-worth (HNW) individuals and families have sought to grow their wealth outside traditional investment options like equities and fixed income. These funds are attractive because they can typically generate a higher return than investment-grade bonds; they work by pooling capital from investors and then lending the money to private companies that aren’t able to access financing from banks – at higher interest rates.

More than half (51 per cent) of family offices surveyed by BlackRock for its 2025 Global Family Office report, released last June, were bullish about private credit, while just over a fifth (21 per cent) viewed the asset class negatively. But that could all be about to change.

Over the past few years, private credit funds have been lending heavily to software firms because of their high margins, recurring revenue, and long-standing loyal customer bases. However, there are now fears that artificial intelligence (AI) will cannibalise the software industry. New tools like OpenAI’s Frontier, an enterprise platform for building, deploying, and managing AI agents, threaten to eat into the traditional SAAS (software-as-service) subscription business model and, consequently, profits.

The potential for disruption caused by AI has raised questions about the quality of loans being handed out by private funds and the borrowers’ ability to pay the money back. This has put business development companies (BDCs) – investment vehicles that offer exposure to private credit markets – in the spotlight.

Why investors are starting to pull out

Data from investment bank RA Stanger, seen by Reuters, shows that the amount of money that flowed into BDCs in the first three months of the year was down 45 per cent from 2025’s inflows. However, not only are investors currently reluctant to put capital into private credit funds, but they’ve also been looking to pull existing investments.

“Some investors have reacted to uncertainty around how AI may reshape parts of the economy, and to a few high‑profile credit events elsewhere in the market,” explains Richard Wicks, private markets senior investment analyst at St. James’s Place. Their jitters have been building since the collapse of two US private credit-backed firms, auto parts supplier First Brands and sub-prime auto lender Tricolor, towards the end of last year.

Wicks adds that this has prompted investors to get cold feet and ask to withdraw their investments. Many BDCs have an ‘open-ended’ or ‘evergreen’ structure, meaning that capital isn’t locked in and investors can redeem their money whenever they choose.

Blue Owl, which has become the poster child of private credit, revealed in early April 2026 that investors had requested to pull 21.9 per cent of the cash in its flagship Credit Income Corp (OCIC) fund between January and March. Meanwhile, its smaller Technology Income Corp (OTIC) fund saw withdrawal demand reach 40.7 per cent. Blue Owl said in shareholder letters for the two funds that the redemption requests reflected “a period of heightened negative sentiment toward the asset class”.

The higher-than-usual level of requests has forced the firm to cap withdrawals at 5 per cent of the value of each fund per quarter. The cap is in place to prevent investors from all heading to the exit at once, which would potentially drain the funds of capital and cause a liquidity crunch. Apollo Global Management, Ares Global Management and Barings have also placed a 5 per cent cap on withdrawals from BDCs.

Credit ratings agency Moody’s downgraded its outlook for the OCIC fund from ‘stable’ to ‘negative’ following Blue Owl’s announcement, citing the fund’s “significantly higher-than-peer redemption requests in the first quarter”.

The impact on the private credit industry

The combination of a surge in redemption requests, AI’s threat to software firms, and a higher risk of borrowers defaulting on their loans has some worried that the private credit industry could slide into a crisis. Bank of England deputy governor Sarah Breeden told the BBC that she is more worried about a “private credit crunch, rather than a banking-driven credit crunch”.

Jamie Dimon, CEO of J.P. Morgan, expects losses on private credit loans to be larger than expected in the coming months. However, he has downplayed fears that the private credit industry poses a risk to the wider financial system. “The actual credit hasn’t gotten that much worse. There are pockets where it has … so we’ll be watching it closely,” Dimon said on the Wall Street bank’s first-quarter earnings call.

Wicks agrees with this sentiment: “Recent movements in private credit appear to be driven more by sentiment than by any material deterioration in underlying credit quality. There are isolated areas of stress, particularly in sectors such as software, but this is not indicative of wider systemic issues.”

As for Blue Owl, it has dismissed any suggestion that the recent redemption requests are a reflection of the quality of its loan book. “While we believe market perception has driven elevated tender activity, underlying credit fundamentals across our portfolio have remained resilient,” stated the firm in its OCIC fund shareholder letter.

Blue Owl and other private credit lenders will report their latest quarterly earnings over the next few weeks. This will give investors insight into what their loan losses are looking like and how they expect the rest of 2026 to shape up.

The uncertainty around potential losses has meant that investors are currently cautious about buying into private credit funds. But Wicks stresses that “long-standing investors with deep experience in the space have, for the most part, have remained committed” to the asset class.

While there may be short-term risks and volatility, private credit funds are likely to remain a popular choice among HNW individuals and families who have a high-risk tolerance and a long-term investment horizon.

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