Private Credit Defaults Hit Record 6.3% in August as Flagship Fund Withdrawals Finally Slow

Since Fitch Ratings reported on Sept. 14 that private credit's default rate hit a record 6.3% in August, the sector has sent a mixed signal. Withdrawal requests at the biggest retail-facing funds slowed in the third quarter. But one major firm walked away entirely from launching a new private credit business, and questions about how a BlackRock fund valued its troubled loans haven't gone away.

Defaults Keep Climbing, But Not Everywhere

Fitch tracked roughly 1,500 private credit issuers and counted 14 default events in August, the highest monthly total in the trailing 12 months, according to the ratings agency's Sept. 14 report as detailed by the Epoch Times. That pushed the default rate to 6.3%, up from 6.1% in July. Three issuers were repeat defaulters. The damage clustered in healthcare, general business services, and transportation.

The pain isn't evenly spread. Houlihan Lokey's Private Credit DataBank found borrowers with less than $20 million in EBITDA are defaulting at nearly 4% by borrower count, and 12% of loans now trade below 90 cents on the dollar, up from roughly 1% in 2023. Cindy Ma, managing director at Houlihan Lokey, said in a Sept. 10 release that "the increase is concentrated, not broad," and that when the market is weighted by loan size, defaults stay below 1% because the largest borrowers keep performing. She expects that size divide to define the market through year-end.

Redemptions Ease at the Biggest Funds

While small borrowers struggle, the giants managing retail money are seeing less panic. The Financial Times reported that flagship private credit funds run by Apollo Global, Ares, and BlackRock posted lower Q3 redemption requests, while Blackstone's held roughly steady.

Ares Strategic Income Fund received withdrawal requests for 13.1% of shares in the third quarter, down from 14.4%. Apollo's roughly $15 billion flagship debt fund saw requests fall to 14.7% from 16.8%. BlackRock's HPS corporate lending fund dropped to 11.5% from 13.3%. Blackstone's $43 billion flagship vehicle held at about 10%, according to the Financial Times figures cited by TradingView and Traders Union.

Across 13 non-traded business development companies that have reported third-quarter results, investors requested $9.6 billion in withdrawals, equal to 10.1% of fund value, down from 11.2% in the second quarter, according to RA Stanger data cited in that reporting.

That's an improvement, but it's not a fix. All four major funds capped quarterly redemptions at 5% of fund value back in the second quarter of 2026, and they're still meeting less than half of requested withdrawals on average. Peter Troisi, an analyst at Barclays, told the Financial Times it's too early to call a bottom in redemptions even though the trend is moving lower.

Hudson Bay Pulls the Plug, BlackRock Fund Under Scrutiny

Separately, Hudson Bay Capital Management, a $20 billion firm, shelved plans for a standalone private credit business, according to Briefs. The firm is parting ways with Raj Vig and Tim Morris, two senior hires recruited from BlackRock's legacy private credit operation who had roughly $1 billion earmarked to seed the new platform.

Vig previously chaired and ran BlackRock's TCP Capital Corp., the publicly traded private credit vehicle BlackRock acquired from Tennenbaum Capital Partners in 2018. That same fund has since taken steep write-downs on troubled loans and drawn scrutiny from U.S. regulators over how those loans were valued, Briefs reported.

Morris, who left BlackRock in 2024, pushed back on any connection to that scrutiny. In a statement, he said that during his time there, "there were no regulatory inquiries or issues related to valuations," and that the funds he oversaw recorded eight straight years of "clean audit opinions and a clean SEC exam." Vig did not comment. Hudson Bay's spokesperson also declined to comment. No charges or formal enforcement action against BlackRock's TCP Capital fund have been disclosed in these reports.

The Bigger Risk Nobody's Pricing In

Michel Lerner, who heads a quantitative research group at UBS, flagged private credit as a hidden risk to the broader AI-driven stock rally in a note cited by Morningstar. He wrote that "the rapid growth of private markets with less transparency on where some of the tail-risks in the segment are" could amplify any shock if borrowing costs stay elevated. Marina Lukatsky of PitchBook LCD has also tracked how numerous non-traded business development companies locked the gates on redemptions earlier this year before this quarter's slowdown.

The defenders of the industry have a point: the largest borrowers, funds, and managers really are performing fine by the numbers, and retail investors panicking over headlines isn't the same as institutional capital fleeing. Pension funds and endowments holding stakes in these vehicles have largely stayed put. But "largely fine at the top" and "a record default rate" are both true at once, and that gap between the biggest players and everyone underneath them is exactly what Houlihan Lokey's Ma says will define the market for the rest of the year.

What happens next depends on whether any single high-profile default reignites the redemption rush that forced these funds to cap withdrawals in the first place. Investors are also watching whether the regulatory scrutiny of BlackRock's TCP Capital valuations produces any formal findings, which as of now have not been made public.