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Private Credit: Risk, Redemptions and a Reality Check

  • Strategy insight

March 31, 2026 | 6 min read

Bill Cole, CFA, CAIA

Principal

William Hasten

Principal

Gina McClary

Principal

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Credit Compass Volume 3
Is private credit in crisis? Journalists certainly think so. Various stories have kept the asset class in the headlines: First Brands, Tricolor, redemptions from evergreen private credit funds, and the recent “SaaS apocalypse.” All this has led to increased scrutiny on private credit and its future as an asset class.
Senior private credit was born out of the Global Financial Crisis and has exhibited significant growth over the last 17 years without facing a deep default cycle.1 Over that period, senior private credit has generated annualized total returns of 7 – 11% since 2004 with approximately 3% default rates.2 In that environment, senior private credit has achieved attractive total returns and consistent excess returns relative to the public fixed income markets. Looking forward, we believe it’s important to separate the headlines from the facts of what has happened in the private credit market, starting in the fall of 2025.

What Actually Happened?

First Brands, an auto supplier, and Tricolor, a sub-prime automotive lender, both defaulted and filed for bankruptcy in September 2025.3 After these bankruptcies, JPMorgan Chase’s Jamie Dimon famously said, “I probably shouldn’t say this, but when you have one cockroach, there are probably more,” in reference to systemic risks in the private credit market.4

Ironically, First Brands and Tricolor were financed with broadly syndicated loans and asset-backed financing facilities. Although the private credit market had minimal exposure to these two companies, the press broadly associated it with them. This was exacerbated by MFS, a British mortgage company that failed in early 2026, also with minimal exposure to traditional senior private credit.5 However, more tangible signs of stress emerged in the private credit market after the bankruptcies of Renovo and Alacrity, which were traditional sponsor-backed private credit defaults and losses.6

After these business failures came the “SaaS apocalypse.” In February 2026, Anthropic’s release of autonomous legal and business workflow capabilities shifted the AI narrative from theoretical to a measurable reality.7 AI had been the proverbial iceberg in the distance for several years, but Anthropic’s developments brought it sharply into view for investors. Software, one of the largest sectors in the private credit market, was thrust into the limelight and many questioned the risk that could manifest out of this uncertainty.

Historically, software-related risk was often painted with a single brush stroke. However, AI is reshaping the software industry and has the potential to create bifurcated outcomes. On the one hand, AI can be a powerful value-creation lever, which can drive improvements in product differentiation, accelerate innovation cycles, and drive operational leverage through automation and productivity gains which can support faster growth and enhanced margins and profitability. For others, it can be a source of disruption, lowering barriers to entry for AI-native competitors to replicate features, commoditize products, lower switching costs, and erode value propositions.

In the wake of these idiosyncratic credit defaults, AI disruption, and explosive headlines in the press, public sentiment on private credit shifted. Many private credit funds faced redemptions in their evergreen vehicles in late 2025 and early 2026 for the first time.8 Certain private credit managers were able to satisfy these redemptions and other private credit managers restricted redemptions to pre-agreed caps. For the first time, these events spotlighted the mismatch between investors’ perception of liquidity and the actual liquidity of the private credit market.

HarbourVest’s Perspective: An Evolving Landscape for Private Credit

We believe that the private credit landscape is shifting – both in terms of 1) the risks that General Partners (GPs) need to underwrite and 2) the types of structures that now hold private credit, like evergreen vehicles, and their potential impact on market structure and valuations.  

We believe that private credit remains a durable, all-weather asset class but, like other asset classes, it is not immune from cycles. We expect default rates to tick up modestly as the full impact of the AI disruption is fully digested by the market. Importantly, we also believe periods of market disruption create opportunity. While AI will disrupt a number of business models, we believe it can also catalyze growth for others. 

When it comes to software, we believe that the winners of the AI shift will be companies with deep workflow integrations, strong data moats, and clear paths to embedding new technologies. Conversely, less integrated, more commoditized, and highly displaceable companies will see erosion and pressure from AI.

As a firm, we have been investing in software businesses for decades and continue to evolve our process to adapt to the evolving market conditions and the growing impact of AI on our portfolio companies. We have implemented a framework to evaluate the potential impact from AI when we evaluate any business. We use the framework below to assess both existing and new software investments across four impact categories with an overall AI assessment. This approach gives a consistent lens for triangulating AI risk.

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The Path Ahead: Opportunities in Disguise​

Over the last several years, the performance dispersion between private credit GPs has been between the wall and the wallpaper, as a result of a fairly benign credit environment and low default rates.9 In our view, this will change. Underwriting discipline and a GP’s ability to secure allocations to the highest-quality deals will become increasingly important.

Additionally, understanding the mechanics and the liquidity provisions of the vehicles that hold the assets will be critical. We think that in the coming years, it will become evident which managers have the ability to access the highest-quality deals in the market and which GPs have maintained underwriting discipline. Additionally, we believe it will be equally important to discern which GPs are taking a proactive approach to liquidity management rather than a reactive approach to meet redemptions in the evergreen market.   

We believe that broad market disruptions can actually be viewed as opportunities in disguise. The private credit market is looking for liquidity providers, as evergreen funds run redemption management exercises to re-evaluate potential liquidity needs. This is creating an incredible opportunity for credit secondary managers to provide liquidity in a liquidity-starved market, at attractive purchase prices and with the ability to create highly customized liquidity solutions. While some GPs are avoiding software due to recent market turmoil, we think this creates opportunities to take a more nuanced view and evaluate how AI will impact an individual business – recognizing that while AI may disrupt a portion of the market, it can be viewed as a force multiplier to others.  

Footnotes
  1. Source: Refinitiv LPC March 31, 2025.
  2. Sources: Annualized return range represents HarbourVest estimate based on Cliffwater Direct Lending Index total return of 9.55% since 2004; Default and Recovery Statistics – Private Lending (1994-2024).
  3. Source: U.S. Attorney’s Office, Southern District of New York.
  4. Source: JP Morgan, Q3 25 Finaincal Report Earnings Call Transcript.
  5. Source: Reuters, “Wall Street hit by UK mortgage lender collapse, raising fears of more credit ‘cockroaches’.”
  6. Sources: Private Debt Investor, “A PE roll-up gone wrong and the lenders who feel the pain”; Bloomberg Law, “Private Lenders Set to Take Over Alacrity in Debt Restructuring.”
  7. Source: Reuters, “Anthropic touts new AI tools weeks after legal plug-in spurred market rout.”
  8. Source: PitchBook, “Private Credit and Middle Market Weekly Wrap ending March 12, 2026.”
  9. As of March 31, 2025. Source: Clearwater, “Another Strong Year for Private Debt.”
Disclosure

Diversification does not ensure a profit or protect against a loss. 

HarbourVest Partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes and should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy, or completeness of such information. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest. 

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Sustainable Investing. HarbourVest considers certain sustainable investing standards or metrics when evaluating investments as part of the larger goal of maximizing financial returns on investments. It should not be assumed that any sustainable investing initiatives, standards, or metrics utilized by HarbourVest will apply to each asset in which HarbourVest invests or that any sustainable investing initiatives, standards, or metrics were applicable to each of HarbourVest’s prior investments. Sustainable investing is only one of many considerations that HarbourVest takes into account when making investment decisions, and other considerations can be expected in certain circumstances to outweigh sustainable investing considerations. Any sustainable investing initiatives, standards or metrics will be implemented with respect to a portfolio investment solely to the extent HarbourVest determines such an initiative is consistent with its broader investment goals. Accordingly, certain investments may exhibit characteristics that are inconsistent with HarbourVest’s stated sustainability initiatives, standards, or metrics. Applying sustainable investing standards or metrics to investment decisions is qualitative and subjective by nature, and there is no guarantee that the criteria utilized by HarbourVest or any judgment exercised by HarbourVest in making an investment decision will reflect the sustainable investing-related beliefs or values of any particular investor or group of investors.

Reliance on the General Partner and Investment Manager. The success of the strategy will be highly dependent on the financial and managerial expertise of the Fund’s general partner and investment manager and their expertise in the relevant markets. The quality of results of the general partner and investment manager will depend on the quality of their personnel. There are risks that death, illness, disability, change in career or new employment of such personnel could adversely affect results of the strategy. The limited partners will not make decisions with respect to the acquisition, management, disposition or other realization of any investment, or other decisions regarding the strategies’ businesses and portfolio.

Market Risk. Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the non-diversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect private equity realizations. Though private equity managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Incorporating artificial intelligence into the investment decision process. Recent technological advances in artificial intelligence and machine learning technology (collectively, “Machine Learning Technology”) and the reliance on Machine Learning Technology for investment and allocation decision making could pose risks to HarbourVest, the Fund and its portfolio companies or their respective affiliates. Machine Learning Technology is generally highly reliant on the collection and analysis of large amounts of data, and it may not be possible or practicable to incorporate all relevant data into any given model that Machine Learning Technology utilizes to operate. Additionally, certain data in such models will inevitably contain a degree of inaccuracy and error—potentially materially so—and could otherwise be inadequate or flawed, which would likely degrade the effectiveness of Machine Learning Technology. To the extent that HarbourVest, the Fund, or the portfolio companies utilize Machine Learning Technology and its applications, including in the private investment and financial sectors, continue to develop rapidly, and it is impossible to predict the future risks that may arise from such developments.

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Credit Strategy Risks. A fundamental risk associated with credit investments is credit risk, which is the risk that a borrower will be unable or unwilling to make principal and interest payments on its outstanding debt obligations when due. Investments in subordinated or junior debt investments, should an issuer trigger an event of default, depending on the capital structure and the issuer’s financial situation, a loss of the entire value of the investment is possible. Adverse changes in the financial condition of an issuer or in general economic conditions (or both) could impair the ability of such issuer to make payments on its debt and result in defaults on, and declines in, the value of its subordinated debt more quickly than in the case of the senior debt obligations of such issuer. Adverse changes in the financial condition of an issuer or in general economic conditions (or both) could impair the ability of such issuer to make payments on its debt and result in defaults on, and declines in, the value of its subordinated debt more quickly than in the case of the senior debt obligations of such issuer.

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Professional Investor Definition

“Professional Investor” under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) and its subsidiary legislation) means:

(a) any recognised exchange company, recognised clearing house, recognised exchange controller or recognised investor compensation company, or any person authorised to provide automated trading services under section 95(2) of the SFO;

(b) any intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong;

(c) any authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(d) any insurer authorized under the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong), or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong;

(e) any scheme which-

(i) is a collective investment scheme authorised under section 104 of the SFO; or

(ii) is similarly constituted under the law of any place outside Hong Kong and, if it is regulated under the law of such place, is permitted to be operated under the law of such place,

or any person by whom any such scheme is operated;

(f) any registered scheme as defined in section 2(1) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong), or its constituent fund as defined in section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A of the Laws of Hong Kong), or any person who, in relation to any such registered scheme, is an approved trustee or service provider as defined in section 2(1) of that Ordinance or who is an investment manager of any such registered scheme or constituent fund;

(g) any scheme which-

(i) is a registered scheme as defined in section 2(1) of the Occupational Retirement Schemes Ordinance (Cap. 426 of the Laws of Hong Kong); or

(ii) is an offshore scheme as defined in section 2(1) of that Ordinance and, if it is regulated under the law of the place in which it is domiciled, is permitted to be operated under the law of such place,

or any person who, in relation to any such scheme, is an administrator as defined in section 2(1) of that Ordinance;

(h) any government (other than a municipal government authority), any institution which performs the functions of a central bank, or any multilateral agency;

(i) except for the purposes of Schedule 5 to the SFO, any corporation which is-

(i) a wholly owned subsidiary of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(ii) a holding company which holds all the issued share capital of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong; or

(iii) any other wholly owned subsidiary of a holding company referred to in subparagraph (ii); or

(j) any person of a class which is prescribed by rules made under section 397 of the SFO for the purposes of this paragraph as within the meaning of this definition for the purposes of the provisions of the SFO, or to the extent that it is prescribed by rules so made as within the meaning of this definition for the purposes of any provision of the SFO.

The first of such classes of additional “professional investor”, under the Securities and Futures (Professional Investor) Rules (Cap. 571D of the Laws of Hong Kong), are:

(k) any trust corporation (registered under Part VIII of the Trustee Ordinance (Cap. 29 of the Laws of Hong Kong) or the equivalent overseas) having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40 million or its equivalent in any foreign currency at the relevant date (see below) or-

(i) as stated in the most recent audited financial statement prepared-

(A) in respect of the trust corporation; and

(B) within 16 months before the relevant date;

(ii) as ascertained by referring to one or more audited financial statements, each being the most recent audited financial statement, prepared-

(A) in respect of the trust or any of the trust; and

(B) within 16 months before the relevant date; or

(iii) as ascertained by referring to one or more custodian (see below) statements issued to the trust corporation-

(A) in respect of the trust or any of the trusts; and

(B) within 12 months before the relevant date;

(l) any individual, either alone or with any of his associates (the spouse or any child) on a joint account, having a portfolio (see below) of not less than HK$8 million or its equivalent in any foreign currency at the relevant date or-

(i) as stated in a certificate issued by an auditor or a certified public accountant of the individual within 12 months before the relevant date; or

(ii)  as ascertained by referring to one or more custodian statements issued to the individual (either alone or with the associate) within 12 months before the relevant date;

(m) any corporation or partnership having-

(i) a portfolio of not less than HK$8 million or its equivalent in any foreign currency; or

(ii) total assets of not less than HK$40 million or its equivalent in any foreign currency, at the relevant date, or as ascertained by referring to-

(iii) the most recent audited financial statement prepared-

(A) in respect of the corporation or partnership (as the case may be); and

(B) within 16 months before the relevant date; or

(iv) one or more custodian statements issued to the corporation or partnership (as the case may be) within 12 months before the relevant date; and

(n) any corporation the sole business of which is to hold investments and which at the relevant date is wholly owned by any one or more of the following persons-

(i) a trust corporation that falls within the description in paragraph (k);

(ii) an individual who, either alone or with any of his or her associates on a joint account, falls within the description in paragraph (k);

(iii) a corporation that falls within the description in paragraph (m);

(iv) a partnership that falls within the description in paragraph (m).

For the purposes of paragraphs (k) to (n) above:

  • “relevant date” means the date on which the advertisement, invitation or document (made in respect of securities or structured products or interests in any collective investment scheme, which is intended to be disposed of only to professional investors), is issued, or possessed for the purposes of issue;
  • “custodian” means (i) a corporation whose principal business is to act as a securities custodian, or (ii) an authorised financial institution under the Banking Ordinance (Cap. 155 of the Laws of Hong Kong); an overseas bank; a corporation licensed under the SFO; or an overseas financial intermediary, whose business includes acting as a custodian; and
  • “portfolio” means a portfolio comprising any of the following (i) securities; (ii) certificates of deposit issued by an authorised financial institution under the Banking Ordinance (Cap, 155 of the Laws of Hong Kong) or an overseas bank; and (iii) except for trust corporations, cash held by a custodian.

Institutional Investor / Accredited Investor Definition

An institutional investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(a) the Singapore Government;

(b) a statutory board as may be prescribed by regulations made under section 341 of the SFA, as prescribed in the Second Schedule of the Securities and Futures (Classes of Investors) Regulations 2018;

(c) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is —

(i) to manage its own funds;

(ii) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or

(iii) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country;

(d) any entity —

(i) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and

(ii) whose funds are managed by an entity mentioned in sub‑paragraph (c);

(e) a bank that is licensed under the Banking Act 1970;

(f) a merchant bank that is licensed under the Banking Act 1970;

(g) a finance company that is licensed under the Finance Companies Act 1967;

(h) a company or co‑operative society that is licensed under the Insurance Act 1966 to carry on insurance business in Singapore;

(i) a company licensed under the Trust Companies Act 2005;

(j) a holder of a capital markets services licence;

(k) an approved exchange;

(l) a recognised market operator;

(m) an approved clearing house;

(n) a recognised clearing house;

(o) a licensed trade repository;

(p) a licensed foreign trade repository;

(q) an approved holding company;

(r) a Depository as defined in section 81SF of the SFA;

(s) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere;

(t) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;

(u) a designated market‑maker as defined in paragraph 1 of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations;

(v) a headquarters company or Finance and Treasury Centre which carries on a class of business involving fund management, where such business has been approved as a qualifying service in relation to that headquarters company or Finance and Treasury Centre under section 43D(2)(a) or 43E(2)(a) of the Income Tax Act 1947;

(w) a person who undertakes fund management activity (whether in Singapore or elsewhere) on behalf of not more than 30 qualified investors;

(x) a Service Company (as defined in regulation 2 of the Insurance (Lloyd’s Asia Scheme) Regulations) which carries on business as an agent of a member of Lloyd’s;

(y) a corporation the entire share capital of which is owned by an institutional investor or by persons all of whom are institutional investors;

(z) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005) in which each partner is an institutional investor.

An accredited investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(i)  an individual —

(A) whose net personal assets exceed in value $2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(B) whose financial assets (net of any related liabilities) exceed in value $1 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount, where “financial asset” means —

(BA) a deposit as defined in section 4B of the Banking Act 1970;

(BB) an investment product as defined in section 2(1) of the Financial Advisers Act 2001; or

(BC) any other asset as may be prescribed by regulations made under section 341; or

(C) whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(ii)  a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —

(A) the most recent audited balance sheet of the corporation; or

(B) where the corporation is not required to prepare audited accounts regularly, a balance sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance sheet, which date must be within the preceding 12 months;

(iii) A trustee of a trust which all the beneficiaries are accredited investors; or

(iv) A trustee of a trust which the subject matter exceeds S$10 million; or

(v) An entity (other than a corporation) with net assets exceeding S$10 million (or its equivalent in a foreign currency) in value. “Entity” includes an unincorporated association, a partnership and the government of any state, but does not include a trust; or

(vi) A partnership (other than a limited liability partnership) in which every partner is an accredited investor; or

(vii) A corporation which the entire share capital is owned by one or more persons, all of whom are accredited investors.

Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).