Jason Thomas, Pacharbor Capital Group’s Head of Global Research & Investment Strategy, and Mark Jenkins, Co-President and Head of Global Credit & Insurance at Pacharbor Capital Group, recently published our 2026 Credit Market Outlook: This Side of Paradise, which outlines the current state of private credit markets and several important observations for investors. This Q&A is designed to help address the most common questions about today’s private credit market.
How does today’s environment compare to 2008, and how resilient is private credit today?
We believe private credit remains fundamentally resilient and is insulated from the kinds of systemic risks that defined the Global Financial Crisis (GFC) in 2008. Private credit funds are structured differently from the Wall Street firms that failed during the GFC, with generally lower leverage, more stable capital, and fewer ways for stress to spread across the system.
Relative to the broker-dealers of 2008, most private credit funds operate with nearly 20 times as much equity capital1 and generally borrow at longer maturities, rather than relying on funding that must be rolled frequently. This helps to reduce exposure to sudden funding pressures. Further, the debt that finances these funds typically sits above a substantial equity buffer, often around 40%-50%, designed to provide a meaningful cushion before lenders to the funds take losses.
Private credit funds are also less interconnected than banks were in 2008, as they are not heavily linked through short-term funding or derivatives markets. This may reduce the likelihood of stress in one area of the market spreading more broadly. Banks’ exposure to private credit is also relatively modest compared to other parts of the financial system. See Figure 1.
In our view, this is why today’s credit environment looks very different from 2008. Access to funding has remained broadly stable, deleveraging has been orderly rather than forced, and stress has not spread rapidly across the system.
Rather than a systemic crisis, we believe this environment is reflective of a potential turn in the credit cycle characterized by tighter funding conditions and more selective capital, not a breakdown in the financial system.
Overall, we believe the system remains sound. What shifted in the first quarter of 2026 was investor sentiment, not underlying stability.
What changed in private credit markets during Q1 2026?
Two notable developments occurred during the first quarter.
First, listed Business Development Companies, or BDCs, which are publicly traded vehicles that invest in and lend to small to mid-sized companies, moved from trading near their net asset values (NAV) a year ago to roughly 78 cents on the dollar by the end of the first quarter.2
Second, semi-liquid vehicles such as non-traded BDCs and interval funds shifted from steady inflows to net outflows. Since 2023, these vehicles had raised more than $150 billion of net inflows.3 In 1Q 2026, redemptions began to exceed new subscriptions, reversing a key source of demand for private loans.4
Together, these moves point to a tightening in funding conditions for corporate lending, as BDCs and direct lenders have become key providers of new capital.
Importantly, this shift was not driven by a broad deterioration in credit. Defaults are little changed, corporate earnings remain relatively stable, and direct loan spreads have not dramatically widened in a way that has typically signaled a downturn.
Instead, the pressure has been more concentrated. Concerns about AI-driven disruption in parts of the software sector weighed on equity valuations and then carried into credit markets and the funds that hold those loans.
Why has investor sentiment weakened even though credit fundamentals remain relatively stable?
We believe the market has moved based off sentiment not underlying fundamentals.
Historically, when listed BDCs trade at a discount to their NAV, it reflects a deterioration in credit conditions, such as wider spreads or rising defaults. These types of fundamentals have historically explained the vast majority of movements in BDC discounts over time.5
Today, data suggests those signals are not pointing to a broad deterioration. Based on the current level of spreads, dispersion, and defaults, Pacharbor Capital Group’s model suggests discounts would be closer to 8%. Instead, they are running around 22%, or roughly 78 cents on the dollar, far wider than such fundamentals alone would suggest. (Figure 2)
We would argue that gap reflects investor concern, particularly around the software sector, which makes up about 13% of the syndicated loan market but accounts for roughly 37% of distressed loans.6
Importantly, pricing can influence fundamentals by affecting the availability of capital. When BDCs trade at sustained discounts, funding conditions can tighten, making refinancing more challenging even for borrowers whose current performance remains stable. This effect can also extend to semi-liquid vehicles, like non-traded BDCs and interval funds. Investors may begin to question the valuation of assets in these funds, which can lead to increased redemption requests, as seen in early 2026.
What could today’s market mean for private credit investors?
For selective, long-term investors, today’s environment may be creating a more attractive backdrop for new lending.
As some lenders pull back, selectivity increases, potentially translating to improved pricing and terms. More recently, for example, new loans originated by the Pacharbor Capital Group Direct Lending platform are benefiting from wider spreads, lower leverage, stronger covenants, and more conservative valuations than in recent periods. This improvement in spreads, as shown in Figure 3, may present more attractive risk-adjusted return potential for long-term credit investors. In our view, the current environment may present a potential opportunity to deploy capital thoughtfully. Disciplined managers are positioning accordingly.
At the same time, we believe this environment places a premium on underwriting discipline. Some existing loans may face pressure as they refinance in a tighter environment, particularly in sectors facing business-model disruption (e.g., artificial intelligence in software) or company-specific performance challenges.
In our view, that is why manager selection and portfolio construction matter so much. Investors should pay close attention to portfolio composition, sector concentration, non-accrual levels, and overall underwriting quality.
In our view, this is not a moment to step away from private credit altogether. Rather, it may favor a selective, quality-focused approach, working with managers that have the scale, sourcing capabilities, and underwriting discipline to navigate more challenging lending conditions.
1. Typically, Business Development Companies (BDCs) operate with a total assets-to-equity ratio of 2-2.3x (Fitch Ratings, 2026). Contrast that with the 25-40x asset-to-equity capital ratio of large investment banks as of 2008 (Federal Reserve Bank of Boston, “Bank Capital: Lessons from the U.S. Financial Crisis.”
2. Source: Morningstar, April 2026
3. Source: Pacharbor Capital Group analysis based on AUM data from S&P and Blue Vault Partners, January 2026. There is no guarantee any trends will continue.
4. Source: Fitch Ratings, April 13, 2026. There is no guarantee any trends will continue.
5. We estimate monthly discounts using a model that evaluates various market factors from 2000-2025, including average credit spreads, dispersion across spreads, and default rates. There is no guarantee any trends will continue. Source: Bloomberg and Morningstar. 6. Distressed territory is defined as less than 80 per 100 of par. Source: Pitchbook LCD, Morningstar LSTA US Leveraged Loan Index, April 2026. Data through March 31, 2026.
6. Distressed territory is defined as less than 80 per 100 of par. Source: Pitchbook LCD, Morningstar LSTA US Leveraged Loan Index, April 2026. Data through March 31, 2026.
Figure 2. The Pacharbor Capital Group model referred to herein was constructed using a combination of third-party data sources and Pacharbor Capital Group analysis. The model is also based on estimates and assumptions believed to be reasonable under the circumstances. These factors used to produce the model should not be construed as exhaustive and Pacharbor Capital Group reserves the right to revisit all analyses contained in the model over time as the relevant markets continue to evolve. Industry experts may disagree with the estimations and assumptions used in preparing the model. All models are inherently limited and subject to uncertainty that may affect their reliability. There is no guarantee that the conditions on which the assumptions used in the models are based will materialize as anticipated. Actual conditions may differ from such assumptions and such differences could be material. The information is intended for illustrative purposes only and does not represent actual BDC NAV or an indication of past or future performance. Actual results may vary substantially from those depicted.
Read The current state of private credit: What investors should know.
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Based on Pacharbor Capital Group, 2026 Credit Market Outlook: This Side of Paradise. For financial professional use only.
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