Private Credit Defaults Stay Low Despite Fraud Fears

Private Credit Defaults Remain Subdued Amidst Fraud Allegations

Despite high-profile allegations of fraud and a recent surge in investor nervousness, the direct lending segment of the private credit market is demonstrating remarkable resilience, with default rates significantly lower than during the Global Financial Crisis. Vivek Bantwal, Co-Head of Private Credit at Goldman Sachs Asset Management, emphasized in a recent interview that while anecdotes of distress have captured headlines, the underlying data paints a far more stable picture.

Separating Anecdote from Data

Recent weeks have seen increased investor anxiety in the private credit space, largely fueled by criminal accusations against two companies that had received substantial loans from private credit firms. These incidents, involving companies like Tricolor and First Brands, raised concerns about broader systemic risks.

“I think it’s important to separate the anecdotes from the data and separate what’s in the data right now, so what’s actually happening, and then we can guess about what might happen in the future.” – Vivek Bantwal, Goldman Sachs Asset Management

However, Bantwal clarified a crucial distinction: neither of the companies involved in these high-profile cases were part of the direct lending or Business Development Company (BDC) market. Instead, the issues were linked to more esoteric segments of the broader private credit market, such as the syndicated loan market, and not the direct lending space where most retail investors typically have exposure.

Direct Lending Data Paints a Stable Picture

The data for the direct lending market, particularly BDCs, shows a current default rate of approximately 1.3%. When factoring in liability management exercises – which can serve as an early indicator of potential distress – the figure rises to around 4%. For the top 20 BDCs, the average non-accrual rate, which signifies loans that are not generating interest income, stands at a modest 1.54%.

To provide context, Bantwal highlighted that during the peak of the Global Financial Crisis in 2008, default rates reached as high as 8.2%. The current figures suggest that for every negative headline, a significantly larger number of companies within the private credit sphere are operating without issue. “For every article about a problem, there’s 98.5 other companies that haven’t having a problem,” Bantwal stated.

AI Disruption and Market Reactions

The conversation also touched upon the impact of Artificial Intelligence (AI) on the software sector, a concern that has rippled across both public and private markets. Publicly traded software companies have seen their shares decline by 30% or more. In the debt markets, corresponding impacts have been observed, with leveraged loans down approximately 2.5% and B loans down around 9.55%.

Bantwal explained that this divergence between equity and debt market reactions is understandable. Equity investors are re-evaluating growth expectations and terminal values in light of potential AI disruption. For credit markets, the impact on loans varies significantly by company. “Not all software’s created equal, and I think you’ll see a range of impact on software companies based on their business models,” he noted.

Goldman Sachs’ Experience with Redemptions

Regarding investor redemptions, Goldman Sachs Asset Management has experienced a slight uptick, with redemptions rising to 3.5%. However, this has been counterbalanced by strong inflows. December saw inflows increase by 11% compared to the rest of 2025, and February marked the second-highest inflow month on record for the firm.

Goldman Sachs attributes its relative stability to a deliberate strategy focused on institutional and ultra-high net worth investors through its private wealth channels. Their U.S. BDC complex represents only about 1.7% of their total private credit Assets Under Management (AUM), with the majority of exposure in single digits.

What Investors Should Know

For investors considering private credit, Bantwal advised a thorough due diligence process focusing on several key areas:

• Manager Track Record: Evaluate the historical performance and experience of the fund manager.
• Origination Funnel: Understand the pipeline of potential investments and the manager’s ability to source deals.
• Funding Diversity: Assess the variety of funding sources available to the manager beyond investor capital.
• Non-Accrual Rates: Regularly review the published non-accrual rates for the fund and compare them to industry benchmarks.

He stressed that the data is readily available quarterly, making diligent research an accessible step for potential investors.

Market Context

The private credit market, estimated to be worth over $2 trillion, has grown rapidly in recent years, offering an alternative to traditional fixed income. BDCs, a common vehicle for retail investors to access private credit, are registered investment companies that often invest in the debt of small and medium-sized U.S. businesses. The recent concerns, while amplified by specific negative events, appear to be largely contained and do not reflect the broader health of the direct lending sector.

Source: This is what investors should AVOID in private credit, Goldman Sachs exec says (YouTube)