Goldman Sachs — Cracks in Private Credit: Divergence and Defaults with Limited Spillover
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Goldman Sachs examines the mounting pressures facing the private credit market after more than a decade of rapid expansion. Highlighting high-profile defaults, valuation disputes, AI disruption in software lending, and rising redemption requests at non-traded BDCs, the report explores whether these fissures pose a systemic threat.
Experts broadly agree that the current stress does not constitute a systemic crisis. Structural liquidity constraints, low leverage levels, and isolation from bank balance sheets significantly reduce contagion risk compared to the pre-GFC environment. However, significant divergence exists regarding mid-cycle pain, particularly in software loans. While some note these loans are typically senior secured with low LTVs, others warn that software comprises 23% of private credit, vastly exceeding high-yield bond exposure. Predictions for software default rates between 2027 and 2029 reach peak levels of 15%, with potential loss rates of 70-100%.
Ultimately, Goldman concludes that while private credit will endure a stricter divergence and default cycle, macroeconomic spillover will remain limited. Short-term pain will concentrate in retail non-traded BDCs, vulnerable software loans, and underperforming managers. The industry's long-term growth narrative remains intact, though capital is expected to shift from retail channels toward institutional and opportunistic credit strategies.
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