Don't Just Focus on the Middle East, Is America's $2 Trillion Private Credit Market the Next "Time Bomb"?

AI Turmoil, Software Sell-offs, Geopolitical Upgrades… As global capital accelerates its “flight” from Wall Street, the $2 trillion private credit market in the U.S. is once again in the spotlight. Investors are initiating a new wave of withdrawals, and a “bank run storm” is rapidly spreading.

Public data shows that the U.S. private credit market mainly refers to loans directly provided to companies by non-bank financial institutions. Its core characteristic is that it does not issue through public markets but is negotiated directly between companies and borrowers. Currently, the U.S. private credit market exceeds $2.3 trillion, and the global private credit market has reached $3.5 trillion.

“Redemption Wave” and “Redemption Limit Wave” Double Pressure, U.S. Financial Sector Plunges

Since 2026, a liquidity contest triggered by concentrated investor redemptions and passive redemption restrictions by fund companies has been fierce on Wall Street.

According to Bloomberg on March 12, the flagship private credit fund of Cliffwater LLC, a private credit giant, received redemption requests accounting for 14% of its total shares in Q1 2026, leading the company to set its buyback limit at 7%. A letter to investors cited that the Cliffwater Corporate Lending Fund, managing $33 billion in assets, closed its tender window on March 10 local time.

Just hours after Cliffwater took action, Reuters reported that Morgan Stanley notified investors of restrictions on redemptions of its $7.6 billion private credit fund, North Haven Private Income Fund (PIF). Morgan Stanley stated in a letter that the fund’s redemption requests surged to nearly 11% in Q1, ultimately only meeting about 45.8% of investor requests, approximately $169 million. Morgan Stanley implied that the private credit industry faces multiple challenges, including uncertainties around M&A recovery, speculation of credit deterioration, and shrinking asset yields.

Additionally, the recent global largest asset manager BlackRock’s private credit fund, HPS Corporate Lending Fund (referred to as “HLEND”), with about $26 billion, restricted some redemption requests, triggering widespread concerns about liquidity in the U.S. private credit sector. Previously, funds under major alternative asset managers like Blackstone and Blue Owl also faced large-scale redemption requests.

Amid internal capital outflows, external leverage sources for private institutions are also under pressure. The Financial Times recently reported that JPMorgan Chase has downgraded valuations of some corporate loans in private equity portfolios. Analysts note that these loans are mainly concentrated in the software industry, considered particularly vulnerable under AI disruption.

Following news of investor rushes to exit, fund companies restricting redemptions, and banks sharply cutting credit lines, the U.S. financial sector suffered heavy losses. After the redemption restrictions were announced on March 6, BlackRock (BLK.N) shares closed down over 7%. As of March 13, Blue Owl (OWL.N) has fallen over 40% year-to-date, Ares Management (ARES.N) down 37%, Carlyle Credit (CCIF.N) nearly 30%, and KKR (KKR.N) over 30%. Since the start of the year, the U.S. financial sector has been under significant pressure, with Goldman Sachs (GS.N) and JPMorgan Chase (JPM.US) both dropping more than 10%, and American Express (AXP.N) nearly 20%.

Multiple Risks Intertwined, Igniting the U.S. Private Credit Fuse

In fact, the U.S. private credit market has experienced frequent defaults since last year. From September to October 2025, First Brands and Tricolor entered bankruptcy proceedings successively. During the same period, Zions disclosed about $50 million in write-offs related to fraud, and Western Alliance pursued nearly $100 million in loans, alleging borrower fraud.

On February 25, 2026, UK real estate lender Market Financial Solutions Ltd (MFS) filed for bankruptcy due to suspected double collateral. The “real value” of approximately £1.16 billion in loans was collateralized by only about £230 million worth of assets, with a potential shortfall of £930 million. MFS’s lenders include Jefferies, Barclays, Santander, Wells Fargo, and Apollo Investment Group, with total risk exposure exceeding £2 billion. A series of landmark bankruptcies and fraud cases have triggered a crisis of confidence among investors, further intensifying industry runs.

Moreover, since 2022, the Federal Reserve has rapidly raised interest rates and kept them relatively high for an extended period. Although the Fed has begun a rate-cutting cycle, the federal funds rate remains at 3.5%–3.75% through the end of 2025. High interest rates have significantly increased the interest burden on floating-rate loans, and prolonged high rates continue to erode borrowers’ repayment capacity. In January, Fitch’s Private Credit Default Rate (PCDR) rose to 5.8%, far above the 2%–4% levels of 2023–2024.

Since 2026, the U.S. software sector has undergone a deep correction. In January 2026 alone, the total market value of the software industry evaporated by about $1 trillion. Market analysis suggests that the immediate trigger was the release of new tools by U.S. AI startup Anthropic, which heightened fears that AI could disrupt the traditional software industry, leading to sell-offs and fundamental doubts about future cash flows and debt repayment capabilities. Several industry insiders point out that AI’s impact on the software sector is long-term and structural. In the long run, most traditional software companies may face severe challenges, with only a few giants possessing strong innovation and resource integration capabilities successfully transforming.

By Q4 2025, special financial institutions like Business Development Companies (BDCs) had an exposure of 20.2% to software services. Morgan Stanley’s previous research report indicated that most risk exposure in the software industry is related to lower credit ratings, with 50% of loans rated “B- or lower,” 20% rated “B,” 26% “CCC,” and only 7% with higher “BB” ratings. Morgan Stanley noted that concerns about AI disrupting the traditional software industry have begun to spread into the credit market. Software accounts for about 16% of U.S. loans, with over 80% of software loans provided by private companies.

Since 2026, ongoing Middle East conflicts have further exacerbated an already fragile U.S. credit market. As international oil prices soar, geopolitical factors transmit through energy prices to macroeconomic outlooks. On March 6, IMF Chief Georgieva stated that if energy prices increase by 10% over a year, it could slow economic growth by 0.1%–0.2% and raise inflation by 0.4 percentage points. For the private credit market already in a high-interest environment, stagflation scenarios mean dual pressure on corporate profits and financing costs.

“Kettle Storm” or “Next Big Shock”?

It turns out that the “butterfly wings” of AI can indeed stir up a “credit hurricane” on Wall Street. As early as October last year, in response to repeated credit fraud incidents in the U.S., JPMorgan CEO Jamie Dimon warned that there may be “more cockroaches” in the credit market, which could be a potential source of investor anxiety. Dimon bluntly stated that when you see one cockroach—i.e., a default or fraud event—it likely indicates there are more hidden, implying systemic risks in the U.S. private credit market.

Will the risks in the private credit market trigger a domino effect spreading to the broader financial system? Industry experts generally believe that currently, risks in the U.S. private credit sector are being transmitted through bank credit losses, asset sales, and risk reassessment. While unlikely to evolve into a systemic crisis, the potential spillover risks should not be underestimated.

Huatai Securities’ research report points out that the U.S. private credit market, exceeding $2.3 trillion, faces multiple shocks from high interest rates, defaults, AI valuation reshaping, and retail redemptions, significantly increasing fragility. The current risk is still in the “clearing stage.” Under a soft landing baseline, systemic spillover is controllable, more like a “storm in a teapot.” But if the economy slips into stagflation or an AI bubble bursts, the alarm of this “canary” will suddenly amplify, potentially evolving into systemic risk.

While global markets focus on Middle Eastern conflicts, the silent proliferation of cockroaches in Wall Street’s basement may be the “next bomb” investors should beware of.