Author: Blazej Kupec, Senior Content Manager

Private credit is under the microscope lately. “The weakness in private credit comes from two places. One is pockets of bad lending, mostly in the US, the other relates to the way some private credit funds have been packaged for retail investors,” says Mike O'Sullivan, Moonfare's Chief Economist (left on photo).

On the fund management side, the bar has risen too. Philip Meschke, Head of PE Investments, argues that transparency with investors has now become a defining manager quality. “The most credible providers set expectations early. They’re clear that liquidity is conditional, comes with trade-offs and that gating is part of the design,” he explains.

We sat down with Mike and Philip to understand why pockets of bad lending don't add up to a crisis, what's behind the redemption pressure and where disciplined investors are looking next.

Mike, it is believed that the “easy phase” of private credit is over. What exactly has changed in this space over the past 1–2 years?

Mike O'Sullivan: The easy phase is over in the sense that established players have built their ecosystems and investment pipelines, whereas newcomers are often taking on new risks in markets that they're not familiar with.

I think two things have changed. One, is that the number of sub-industries that private credit has invested in the US has exploded. It's no longer traditional private credit lending in the sense that it was even five years ago, or even in the way it is in Europe now.

The second thing that's changed is that the market is becoming more competitive. AI now offers a huge field for private credit lenders to play in. However, the risk is that many of them may end up taking on the same risks that are effectively leveraged positions on AI.

Some believe current stress may spark a new financial crisis. Is this narrative around systemic risk overstating the situation? How so?

I don't agree we’re heading into a crisis at all. First of all, credit spreads in various sub-parts of the high-yield market and the market for loans are not that high.¹ There's not much stress on banking systems either. So there are few actual signs of a financial crisis or a credit crisis.

In reality, the weakness in private credit comes from two places. One is pockets of bad lending, mostly in the US. The other relates to the way some private credit funds have been packaged for retail investors, which has occasionally contributed to higher redemption activity and added pressure on those funds.

As you’ve already alluded to, defaults and overdue loans continue to be at relatively low levels — although many anticipated they will rise in the coming months and years. What signals should investors watch as conditions potentially worsen?

We haven't had a real recession in nearly 20 years, and that's partly because of resilience in the credit market and partly because private investors and households have been deleveraging, while governments have been increasing leverage. So we're very focused on all the stress signals in the credit cycle.

What we don't see are red flashing lights: growth is still robust, interest rates in general are relatively low and we think that there's scope for the business cycle globally to improve.

In your view, which parts of private credit are best insulated – and which are most exposed?

I'm very old-fashioned here, and I think that more traditional private credit lending, where private credit funds have replaced the activity of banks, is true private credit lending. I would generally avoid lending in very niche areas of the economy, as we've seen happen in the US.

How concerned are you about exposure to private equity-backed software companies? Do you see AI disruption as a genuine credit risk?

So far, more of the private credit in the technology sector is being invested in AI, as opposed to software, according to Pitchbook. There are certainly pockets of lending to software, but most of the private credit action is in areas like data centres and energy infrastructure, which is still a very hot area.

I do have a concern that, in the long term, this may become a crowded investment field and would be less profitable, given the huge quantities of money thrown at it.

Philip, recent headlines have focused on $20 billion in redemption requests in the first quarter of 2026 from some private credit funds. How significant do you think these outflows really are?

Philip Meschke: The $20 billion number is eye-catching but it helps to zoom out. In a private credit market that now exceeds $1.8 trillion,² those redemptions represent just over 1% of overall capital. While they are noteworthy, they don’t point to a systemic crisis. If anything, it serves as a reminder that liquidity in private markets is conditional and that fund structures need to be robust enough to withstand periods of sustained stress.

However, it also needs to be said that this stress is real. Managers are facing slower deployment, market risks and the challenge of managing liquidity within inherently illiquid portfolios. None of this is entirely new - we’ve seen similar activity before, for example during the gating episodes in UK property funds such as at the onset of the Covid-19 pandemic,³ where investor behaviour tested liquidity structures.

There appears to be some misunderstanding about why managers may decide to limit redemptions. How should investors think about the purpose of gating?

The narrative around gating needs to be reframed. In my view, gating isn’t a sign of weakness or mismanagement. If anything, it shows that the fund’s safeguards are working as they should.

At its core, gating is there to prevent forced selling. Without it, a sudden wave of redemptions could push managers to offload illiquid assets at unfavourable prices. That risks destroying value for everyone, not just those exiting, but also those who stay invested.

It’s also important to remember that gating is a discretionary tool. It’s only used in more extreme situations, with the goal of protecting all investors. In that sense, it acts as a circuit breaker. It ensures the manager — not short-term market pressure — controls when and how assets are sold.

All in all, gating is a standard and pre-defined feature of semi-liquid or semi-liquid structures. When it’s used, I believe it reflects prudent governance rather than structural weakness.

How does liquidity work in evergreen funds during times of stress?

The key principle investors need to understand is simple: liquidity has a price. Semi-liquid and evergreen structures do offer periodic access to capital. But that access comes with trade-offs which become more visible in times of stress.

I want to point to a couple of things. First, liquidity is conditional, not guaranteed. Redemptions depend on manager approval, overall demand and fund-level constraints. It’s not something investors should ever assume is automatic.

Second, there’s a real cost to providing liquidity. Managers need to hold more cash or liquid assets, pace their investments more carefully and plan for potential exits. All of that can weigh on returns compared to a fully invested, closed-end fund.

Third, these structures come with built-in limits. For example, quarterly redemption caps and sometimes fees for early exits. These aren’t there to penalise investors but to manage liquidity responsibly and discourage short-term behaviour.

And finally, manager discretion plays an important role. In tougher market conditions, managers can limit or suspend redemptions. That’s again it’s to avoid forced selling and to protect the fund from legal regulatory or tax complications.

In your view, what differentiates managers who will navigate this environment successfully?

There’re a few defining features. Discipline and selectivity, for example, matter more than ever. In a market with supply–demand imbalances, the best managers will stay patient and focus on high-quality deals that fit a consistent strategy.

Transparency on liquidity is also critical. The most credible managers set expectations early. They’re clear that liquidity is conditional, comes with trade-offs and that gating is part of the design.

We see governance and alignment as key signals of trust. That includes robust valuation processes, strong oversight and meaningful co-investment from the manager.

Finally, experience across cycles makes a real difference. Teams that have successfully worked through past downturns, and have restructuring and operational expertise in-house, are far better equipped to manage stress and capture opportunities.

Speaking of opportunities in private credit, where are you seeing the most compelling ones?

The opportunity set is still very strong with a few areas that stand out. European mid-market lending, for example, offers a complexity premium. The market is less crowded than in the US and managers with strong local networks can access attractive risk-adjusted returns that are harder to find elsewhere.

Opportunistic and stressed situations are also attractive. Higher borrowing costs and tighter interest coverage are putting real pressure on companies that need to refinance. That’s opening the door for opportunistic and distressed strategies, particularly where businesses are fundamentally sound but weighed down by inefficient capital structures.

And third, the maturity wall. Between 2027 and 2029,⁴ ⁵ a huge amount of debt will need refinancing. Managers with dry powder are well placed to step in as lenders of choice for otherwise healthy companies with stretched balance sheets.

All these trends taken together should create a strong backdrop for patient capital and disciplined underwriting.