The Headlines Are Real. But They’re Not the Whole Story.
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Private credit is under a microscope. (We use “private credit” broadly here, as some practitioners reserve the term for direct lending alone and would rightly call the majority of what we do specialty finance. The distinction, as we’ll argue, actually matters). In the first quarter of 2026, Blackstone’s $82 billion BCRED vehicle, a non-traded BDC, reported record redemptions of $3.8 billion against just $2 billion in new inflows.¹ Gross inflows to leading BDC managers from wealthy clients collapsed to $1.27 billion in February, less than half of the prior year’s figure, according to Jefferies.² And it isn’t just BDCs: the $32 billion Cliffwater Corporate Lending Fund, one of the largest SEC-registered interval funds in the country, saw investors attempt to redeem 14% of shares in a single quarter, nearly three times its 5% cap, prompting S&P Global to cut its outlook to negative.³ Two different vehicle structures. The same underlying problem.

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Yes, default rates in private credit have been rising, and the headlines have made sure everyone knows it. A default, as typically measured in private credit, captures any technical breach of loan terms, including covenant violations, missed reporting deadlines, and maturity extensions, not just instances where a borrower has stopped making cash payments. But the more telling metric is nonaccruals: loans where a borrower has stopped making cash payments and the lender has ceased recognizing interest income, the clearest signal of actual credit stress. Across the private credit BDC universe, nonaccruals averaged just 1.8% as of September 30, 2025, per Blackstone’s year-end shareholder letter, with BCRED itself coming in even lower at 0.6% of cost as of December 31, 2025⁴. These are not the numbers of a market in fundamental distress. The headline default rate reflects technical and covenant-driven events; the actual cash loss experience tells a far more benign story. Fear is outpacing fundamental credit deterioration. This is, at its core, a confidence and liquidity problem, not a credit collapse.

“Semi-liquid funds were designed and marketed as products offering limited liquidity, especially during times of stress. It’s important to retrain the investor base on the nature of private assets.” — Glenn Schorr, Senior Analyst, Evercore ISI

Before drawing broad conclusions about private credit, it is worth asking a more precise question: what actually caused this - and does it apply across all private credit strategies? In our view, it does not. The current dislocation is rooted in product design and investor expectations, not a signal about the health of private lending broadly.

A Structural Liquidity Mismatch – By Design

Both BDCs and interval funds, the two vehicle types at the center of today’s redemption pressure, share a common feature: they are built to be accessible by a wide wealth-channel investor base, offering quarterly liquidity windows on portfolios of five-year or longer loans. Both vehicles have a built-in mechanism that limits investor redemptions, typically to a fixed percentage of fund assets per period, to align liquidity with underlying illiquid investments and protect remaining shareholders. This provision has been working as intended, generally capping redemptions at 5% of shares per quarter to prevent a fire sale of illiquid assets. Jon Gray, Blackstone’s president, framed it well: investors in these products are “trading away a bit of liquidity for higher returns" (that’s the same tradeoff institutional investors have made for a long period of time). Not enforcing those limits creates a first-mover advantage for early redeemers and a prisoner’s dilemma for everyone who stays. The deeper problem is that many individual investors either did not fully understand those terms when they invested, or understood them abstractly but never expected to encounter them in practice. When they did, the rational response was to get in line ahead of everyone else, which is precisely the dynamic the gates were designed to slow, but cannot fully prevent.

The lesson is precise: promising short-term liquidity while holding long-term illiquid assets is a structural liquidity mismatch, one that was embedded in the product design from the start. By the end of Q1 2026, average redemption requests across larger private credit funds had reached 15% of NAV, according to iCapital’s analysis, nearly three times the standard 5% cap. Sixth Street Partners, themselves a major private credit manager, described what is unfolding as an “intense yet warranted reset” for the sector. While legitimate concerns around software exposure and AI disruption have contributed to the unease, the severity of the redemption pressure has more to do with who is in the fund and whether the liquidity terms were ever truly matched to the underlying assets than it does with fundamental credit deterioration.

The Case for Niche Specialty Finance as a Portfolio Allocation
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Sponsor-backed middle market direct lending remains a meaningful component of many institutional private credit allocations. A satellite allocation to niche and specialty finance is not a departure from that view, it is a complement to it. These strategies generally earn their place through a distinct risk profile, differentiated income, and structural characteristics that tend to behave differently from core direct lending across a range of market environments.

The managers we access typically operate in senior secured, asset-backed structures. When a loan is backed by physical collateral, government receivables, or a law firm’s future dockets rather than enterprise value, the loss-given-default calculus is often fundamentally different. The lender is generally closer to the collateral from day one, and recovery in a stress scenario typically has a more believable line of sight than enterprise-value-dependent lending can offer with the same conviction.

These strategies often carry covenant and cash control structures that are notably tighter than what has become standard in large-cap sponsor-backed lending. Covenants are not just legal protections; they are generally early warning systems. Managers who maintain cash controls and tight covenants tend to see stress emerging earlier, often have more levers to pull, and are typically better positioned to protect principal before a situation deteriorates. That operational proximity to the borrower is one of the hardest features to replicate at scale.

Pricing in these segments often reflects the relative absence of competition. Loan sizes tend to be too small, structures too complex, or the expertise too specialized for large platforms to pursue efficiently. That dynamic can produce better economics, stronger terms, and more disciplined underwriting than the broadly syndicated market has delivered in recent years.

The investor base in these strategies is typically structured to match the underlying assets. Lock-ups and redemption terms generally align with loan duration, redeeming LPs are often transitioned into a natural run-off portfolio rather than triggering forced asset sales, and the LP base tends to be composed of investors who entered understanding these are not a liquidity option. That structural discipline is not incidental to the investment case; it is part of it.

As a satellite allocation alongside core sponsor-backed direct lending, niche specialty finance can offer differentiated income, lower correlation to the dynamics currently pressuring the broader private credit market, and a structural profile that is generally well suited for exactly the kind of environment we find ourselves in today.

_{This commentary is for informational purposes only and does not constitute investment advice or an offer to sell or solicitation to buy any securities. The views expressed herein are as of the date of publication, are subject to change. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Investments in private credit and specialty finance strategies are illiquid and may not be suitable for all investors. Epic Funds manages private investment vehicles available only to Qualified Purchasers as defined under the Investment Company Act of 1940. References to specific underlying investments are for illustrative purposes only and do not constitute a recommendation of any individual security or strategy. Such examples do not represent all investments made by Epic Funds and are not indicative of overall results. There can be no assurance that any investment strategy will achieve its objectives. Epic Funds has an economic interest in the strategies described herein. Information has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed.
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_{Sources: Bloomberg Opinion (March 5, 2026); Bloomberg News (March 4, 8 & 17, 2026); S&P Global Ratings (March 18, 2026); The Wall Street Journal (March 16, 2026); Evercore ISI; PitchBook (March 2026); Jefferies Financial Group analysis; iCapital, “Looking Beyond the Redemptions II” (April 2026); Blackstone BCRED Year-End 2025 Shareholder Letter (February 2026); Sixth Street Specialty Lending investor letter (March 2026); Epic Funds internal portfolio data.}