Refinancing resets the private credit market
Private credit has attracted no shortage of attention this year. Headlines have focused on fund outflows, software exposure, and questions about the durability of returns as borrowers face a higher-rate environment. Yet much of the recent discussion has centred on pockets of the market rather than the broader opportunity set.
The private credit landscape in 2026 is largely shaped by the current refinancing cycle. Many borrowers benefited from low-rate pandemic-era financing conditions and now face materially higher borrowing costs. Between 2026 and 2029, approximately $1.9 trillion of U.S. leveraged loans and high-yield bonds are expected to mature, creating a more selective environment for both borrowers and lenders. While this environment may create greater dispersion among borrowers, it may also create opportunities for disciplined investors to access stronger lending terms and potentially more attractive risk-adjusted returns. Over the next six months, we believe that investors should pay close attention to three developments that may create opportunities: semi-liquid fund outflows, concentrated software-sector risks, and the growing appeal of investment grade private credit.
Recent outflows may not signal weakness
Recent headlines around outflows from semi-liquid vehicles, including interval funds and business development companies (BDCs), have fueled concerns about the health of private credit. Yet these developments in our view are the result of liquidity dynamics rather than widespread deterioration in loan quality.
Our manager monitoring data shows little evidence of broad-based credit deterioration. Nearly two-thirds of our monitored private credit managers experienced no change in watchlist status during the latest review period. Even with the outflows, most private credit vehicles have liquidity management tools designed to prevent forced asset sales. As a result, recent redemption activity says more about fund structures than underlying credit quality.
As capital becomes less abundant, lenders regain negotiating leverage for stronger terms, better pricing, and improved protections on new investments. The result is a more attractive opportunity set for investors than when fundraising activity and competition for deals peaked.
Software risks warrant a selective approach
Over the past year software and affiliated sectors accounted for more than 28% of total loan assets managed by BDCs and interval funds, representing a meaningful concentration within parts of the private credit market. At the same time, advances in artificial intelligence are creating uncertainty around the long-term durability of some software business models. Investors should avoid extrapolating these risks across the broader private credit universe outside the BDC world that has grown to $1.7 trillion globally. In our view, these developments reinforce the importance of selectivity, underwriting discipline, and sector expertise rather than signaling broad-based weakness across private credit.
Many software companies continue to generate strong cash flow and maintain recurring revenue streams that support their ability to meet loan obligations. As a result, investor focus is increasingly shifting towards long-term competitive positioning. The challenge is identifying which businesses can sustain pricing power and customer demand as technology evolves, and which may face increasing pressure on future earnings power.
This distinction will become more important as refinancing activity accelerates. Companies with durable business models are more likely to retain access to capital on attractive terms, while weaker issuers may face higher borrowing costs or more restrictive financing conditions. As a result, performance dispersion across borrowers and managers could become more pronounced, making credit selection an increasingly important driver of outcomes.
Investment grade private credit gains attention
Historically favoured by insurance companies, investment grade private credit has expanded to roughly $300 billion and is attracting interest from a broader set of investors, public investment grade spreads remain compressed, investors are increasingly exploring private markets as a potential source of additional income while maintaining a focus on credit quality.
The backdrop in public markets helps explain why. Generating meaningful incremental yield through public markets increasingly requires larger and riskier credit overweights. As of May 2026, U.S. investment grade spreads stood at approximately 0.74%, while European investment grade spreads were roughly 0.83%. Those levels are near 30-year lows and leave investors with limited compensation for taking additional credit risk.
Investment grade private credit may offer an alternative. Much of the market consists of asset-based loans backed by identifiable collateral and contractual cash flows, creating opportunities to earn an illiquidity premium while maintaining a high-quality credit profile. For investors seeking additional income within core fixed income allocations, investment grade private credit may provide an attractive complement to public markets without requiring a significant move down the credit spectrum.
Investor implications
Recent headlines have focused on outflows and concentrated sector risks, but the more important development is the refinancing cycle now underway. As borrowers return to the market, differences in business quality, capital structures, and financing needs are likely to become more apparent.
Rather than viewing current market developments as signs of broad weakness, investors may benefit from focusing on areas where disciplined underwriting, strong collateral structures, and experienced manager selection can help identify resilient sources of income and diversification within private credit.
This article was provided by Keith Brakebill, Co-Head of Global Fixed Income, Russell Investments.
