On April 9, 2026, Howard Marks published “What’s Going on in Private Credit?” – a full-length memo on the state of the market. Marks is co-founder of Oaktree Capital Management, one of the world’s largest alternative investment managers, and his memos are widely considered the most important public thinking on credit markets. When Marks devotes an entire memo to a single market, it is worth paying close attention.
The short version: private credit has grown from a $150 billion niche into a $3.5 trillion global market in two decades. That growth has created genuine opportunity, but also the classic hallmarks of a market running ahead of itself: deteriorating standards, too much capital chasing too few quality deals, and the early stages of a reckoning. Not a crisis, but a transition. Retail investors being marketed private credit products today need to understand the difference between the early story and the current reality.
If you read my earlier piece on private markets explained for retail investors, this article picks up where that one left off.
How We Got Here: From Niche to $3.5 Trillion
Before the Global Financial Crisis, banks dominated corporate lending. High-yield bonds, pioneered by Michael Milken in the 1970s-80s, offered an alternative but banks were the main game. After 2009, regulators forced them to pull back from leveraged lending. Non-bank direct lenders filled the gap, and early conditions were ideal: high rates, strong covenants, limited competition.
Then came the flood. Institutional capital poured in through the 2010s. Hundreds of new managers launched funds. Returns compressed. Covenants weakened. According to AIMA, global private credit AUM has surged from $150 billion to $3.5 trillion. In the US alone, the market grew from $500 billion to $1.3 trillion in five years. Capital deployment in 2024 hit $592.8 billion or up 78% year-on-year.
The Classic Bubble Pattern
Marks lays out a familiar framework: a genuine innovation emerges, early investors are rewarded, envy draws in capital, standards fall, late entrants overpay. He borrows Buffett’s line: “First the innovator, then the imitator, then the idiot.”
One of his sharpest observations: the absence of mark-to-market volatility in private credit was confused with the absence of risk. Because these loans are not publicly traded, reported values did not fluctuate and that smoothness made the asset class look safer than it was.
The environment has changed materially. Rates rose 400+ basis points from 2022. PE-backed companies carry debt designed for near-zero rates. Stresses are appearing: bankruptcies of First Brands and Tricolor in mid-2025 are early signals. The Cliffwater BDC Index fell roughly 6.6% in 2025, sharply underperforming the S&P 500’s ~18% gain.
The Software and AI Fault Line
The most specific stress Marks identifies is software concentration. Direct lending portfolios carry roughly 20-30% software exposure, versus 4-5% for high-yield bonds and 10-15% for syndicated loans. Many software companies were acquired at ~20x EBITDA with heavy leverage.
AI’s rapid advance, Marks points to Anthropic’s early 2026 breakthroughs as an inflection point, has compressed equity valuations and the cushions protecting lenders. An Oaktree assessment noted the pressure is “largely flow- and sentiment-driven rather than the result of credit deterioration.”
Business Development Companies (BDC) now trade at 20%+ discounts to reported NAV. New loan spreads have widened 50-100 basis points from late-2025 lows. The default rate hit 9.2% in 2025, up from 8.1% the prior year. Not a collapse but the direction is clear.
The Retail Investor Dimension
One of the most consequential trends of the 2020s has been marketing direct lending to individual and retirement investors. Marks notes this explicitly. According to AIMA, 24% of private credit AUM is now held by retail and mass-affluent investors and growing.
As Reuters argued, “before democratizing private credit, let’s see it pass a real test.” The market has never endured a severe downturn. A Stanford GSB study warned that expanding retail access could create systemic risks.
The structural challenges:
- Non-traded BDCs impose redemption and liquidity limits meaning you often cannot exit when you want to
- Valuations are manager-reported, not market-determined
- The secondary market is extremely thin, less than 1% of the primary market, per the CFA Institute
- Information asymmetry is acute: Oaktree has entire credit analysis teams; most retail investors do not
We covered these issues in our private markets explainer. The core risk: being marketed a product at the end of a benign cycle, during emerging stress, with limited ability to exit.
What Marks Thinks Happens Next
Marks is not calling for a crisis. Oaktree’s direct lending exposure is roughly 15% of AUM, a position they reached through deliberate pullback. He draws a parallel to high yield in the late 1980s: over-indulged, stressed, but survived to become a legitimate $1.5 trillion market. Private credit may follow a similar arc.
The PE performance data adds context. The MSCI US Private Equity index returned 5.8% annualized from 2022 to Q3 2025, versus 11.6% for the S&P 500. Since PE-sponsored borrowers are the bedrock of direct lending, the fate of the two is “entwined.” Good managers with disciplined credit selection will likely navigate well; the pressure falls on those who deployed aggressively in 2021-2023 at the tightest spreads. Moody’s projects private credit AUM will reach $3 trillion by 2028; the asset class is maturing, not disappearing.
What This Means for You
If you hold private credit products, the priority is understanding what you own: sector exposure, vintage, and actual liquidity terms. If you are being marketed these products now: the cycle has turned. Entry timing matters in illiquid assets in ways it does not in public markets. You cannot dollar-cost average into a locked-up fund. If valuations decline after you commit capital, you wait, potentially for years, while public markets compound.
The risk is not binary. It is the grinding reality of locked-up capital in assets that may underperform:
- The information gap between institutional and retail investors is vast and structural
- Illiquidity benefits managers (stable capital) more than investors (no exit)
- The case for building a strong, liquid public market core first remains as compelling as ever
Final Thoughts
Marks notes that the high-yield market of the 1980s went through exactly this pattern: explosive growth, over-indulgence, stress, survival. Private credit may follow the same trajectory.
But the investors who entered high yield late in 1989, at peak deployment and minimum standards, had a very different experience from those who entered in 1983 with high rates and strong covenants. Where you are in the cycle matters.
Key takeaways:
- Private credit has grown from $150 billion to $3.5 trillion in two decades; genuine innovation, but also classic late-cycle dynamics
- Lending standards have deteriorated; default rates are rising; software-heavy portfolios face sector-specific headwinds
- BDCs trade at steep discounts to NAV; public-private performance divergence is widening
- Retail investors face structural disadvantages: illiquidity, information asymmetry, manager-reported valuations
- This is not a crisis, but the easy part of the private credit story is over
- For most retail investors, a liquid, diversified public market portfolio remains the strongest foundation
The honest answer today is that the easy part is over. The question worth sitting with is whether the products being marketed to you now were designed for the market that was or the market that is.