In February 2026, Blue Owl Capital – one of America’s largest direct lenders and a prominent financier of the AI infrastructure boom – halted redemptions on its OBDC II non-traded retail private credit fund. Worse, it was forced to liquidate its best assets to meet redemption demands. The Financial Times reached for an uncomfortable analogy: private credit’s BREIT moment, invoking Blackstone’s imposition of withdrawal limits on its non-traded real estate fund in 2022 when redemption requests outpaced its ability to pay. The asset classes may be different, but the structural problem is identical.

Then, just weeks later, Apollo Global Management, whose credit empire has crossed US$1 trillion in assets under management, announced daily pricing for its private credit portfolio, framing the move as a transparency initiative. As Leyla Kunimoto, founder of Accredited Investor Insights observed: “An opaque process, run more often, is still opaque.”

Both episodes illuminate the same hidden vulnerability in the US$3.5 trillion private credit market: Instruments built for patient, long-term capital have been packaged into vehicles that promise daily pricing, thereby creating the illusion of near-term liquidity they cannot reliably deliver. To understand why that fault line is widening – and which principles will determine who gets hurt – we first need to understand the revolution that created it.

A world transformed

In 2006, financing a leveraged buyout was a logistical exercise bordering on performance art. To acquire a company using substantial borrowed capital (with the debt sitting on the target’s own balance sheet rather than the buyer’s), it took a relationship bank, a syndicate of over 50 institutional investors and five debt instruments stacked in layers of seniority. On top of that, a battery of financial tests on a quarterly basis kept lenders closely, sometimes uncomfortably, involved in the business.

In 2026, you call one lender, sign one credit agreement and close in three to four weeks. This instrument is the unitranche: a single loan that blends senior and subordinated debt into one facility, offered by private credit funds (such as Ares Management, Blue Owl and Apollo) rather than a bank syndicate. The global private credit market has grown from under US$500 billion a decade ago to more than US$3.5 trillion today, financing roughly 80% of North American leveraged buyouts by deal count.

The transformation has been quite spectacular. The reckoning, it now appears, has begun.

Three forces that built this market

Seldom has a market of such scale been built so quickly without anyone quite meaning to build it. Three structural forces, operating simultaneously, produced it.

Regulation: The post-2008 Basel III capital requirements made leveraged lending expensive for banks. The Volcker Rule further constrained their ability to hold risky assets on their own books. Banks retreated from the leveraged loan market because regulators made it economically painful not to. Non-bank lenders with patient capital from pension funds, sovereign wealth funds and insurance companies – investors who needed yield and had the time horizon to wait for it – then stepped into the space they vacated.

Near-zero interest rates: A decade of near-zero rates following the global financial crisis pushed institutional capital up the risk curve. When government bonds yield almost nothing, a private credit loan paying SOFR plus 550 basis points looks extraordinarily attractive. The flood of capital into the asset class was enormous – and, for most of that decade, largely rational.

“Covenant-lite”: The classic bank debt structure embedded two protections: quarterly financial tests through maintenance covenants and direct representation at the negotiating table. Together, these gave lenders early warning of deterioration and room to act before things got truly bad. As competition among lenders intensified, private equity sponsors negotiated these away. More than 90% of broadly syndicated loans in the United States are now “covenant-lite”, tested only if the borrower proposes actions such as selling assets. In private credit, the net leverage test is still in place, but with enough headroom that it is rarely triggered. As borrowers gained new operational freedom they had never enjoyed, lenders lost the early-warning system they had always relied on. At the time, with coverage ratios running at a comfortable 3x, nobody worried too much.

When the maths bites back

The rate shock of 2022–2023 provided a clear reminder of the real cost of leverage. Consider a company with an EBITDA (earnings before interest, taxes, depreciation and amortisation) of US$250 million. In 2021, a 6x leveraged unitranche at an all-in rate of roughly 5.5% came at an annual interest cost of around US$83 million – leaving a comfortable 3x interest coverage ratio. 

In 2023, with the cost of borrowing (SOFR) at 5.3% and a spread of 550 basis points, the same structure cost 10.8% and racked up US$162 million in annual interest. As interest coverage fell below 2x, new deals were repriced at lower leverage multiples. Lenders of older deals, made when valuations were optimistic and with minimal covenant protection, found themselves in distress with no mechanism to trigger early engagement.

The covenant, it turned out, played an important role in giving lenders a say. It’s easy to remove it in good times; you’ll discover its value only when you need it the most. As I wrote in a recent paper on rethinking secondaries in private markets: “Liquidity, like health, is best appreciated in its absence.”

The fault line

This brings us back to Blue Owl and Apollo. The products at issue – non-traded BDCs (business development companies) and daily-priced credit vehicles – are not representative of the core of the private credit market. For the majority of the private credit market, the structural logic still holds: patient institutional capital well-matched to patient, illiquid assets. But these episodes matter because they reveal what happens when structures are stress-tested: The gap between the promise and the reality of liquidity becomes very public.

Private credit has, on balance, improved leveraged finance. The unitranche is faster, more certain, more flexible and better suited to private equity sponsors and their portfolio companies than the old 50-investor bank syndicate ever was. The difficulty lies upstream of the instrument: In a decade of easy money that taught borrowers and lenders alike to expect a world where liquidity is always promised and the bill, somehow, never quite arrives. Well, now it has.

The principles that don’t change

Three principles have survived 30 years of financial innovation and will survive this cycle, too.

Debt seniority determines cost: The hierarchy of claims is immutable. Whoever is paid last demands the highest return, and no structural creativity has ever permanently altered that logic.

Coverage ratios constrain debt capacity: However flexible the covenant package and however supportive the lender relationship, a business must generate enough cash to service its debt. The rate shock of 2022–2023 was a painful but entirely predictable reminder.

Leverage amplifies both gains and losses: In good times, leverage makes equity returns look extraordinary. In difficult times, it works with equal efficiency in the opposite direction. The mathematics is entirely indifferent to the market conditions that prevailed when the deal was signed.

The instruments, market structure and rate environment may change. The principles, stubbornly, do not.
 

A longer analysis of LBO debt structuring across three market eras – from the classic multi-tranche bank-syndicated model to the private credit-dominated landscape of 2026, including a structured decision framework and the interest rate sensitivity modelling referenced above – is available as a working paper.