How Committed Is Committed Capital? Three Structural Shifts Reshaping Private Credit in 2026

January 17, 2026

The first two weeks of 2026 have provided more clarity on private credit's structural trajectory than the entire fourth quarter of 2025. Three developments—geographic reallocation, rising credit stress, and the first real test of perpetual capital structures—reveal fundamental tensions in how the industry has positioned itself to investors.

This post examines each trend through data released in early January 2026, then addresses the question these trends collectively raise: whether the "permanent capital" structures that now dominate fundraising represent genuine commitment or constitute maturity mismatches reminiscent of traditional banking fragility.

Geographic Divergence: Capital Flows Follow Genuine Financing Gaps

European private credit fundraising reached USD66 billion through the first nine months of 2025, representing a 17% increase over the entirety of 2024. More significantly, European funds now account for 35% of global private debt fundraising, up from 24% in the prior year. This isn't marginal reallocation—it represents a structural shift in where global capital perceives opportunity.

The United States, meanwhile, is experiencing the inverse dynamic. Non-traded business development companies (BDCs) saw redemption requests surge 200% in the fourth quarter of 2025. These requests are now running at approximately 5% of net asset value compared to a historical norm of 2%. If redemptions sustain at this elevated level, the implication is approximately USD 45 billion in annual net outflows from U.S. retail private credit vehicles.

This divergence might reflects economic fundamentals rather than sentiment! European borrowers face genuinely constrained bank lending following Basel III capital requirements and European Banking Authority stress testing regimes. Private credit fills an actual financing gap in markets where relationship lending has contracted. U.S. borrowers, by contrast, now have again access to bank lending following the December 2025 withdrawal of the leveraged lending guidance. Banks can once again underwrite transactions at 7-9x leverage without supervisory intervention, directly competing with private credit on pricing and terms.

The academic parallel is straightforward. Capital flows to jurisdictions where regulatory constraints create market segmentation and genuine financing needs. When those constraints disappear, as they have in the United States, the regulatory arbitrage that supported premium pricing erodes. We are observing classic geographic arbitrage in real time.

The True Default Rate

Private credit managers consistently cite default rates below 2% as evidence of portfolio resilience. This figure, while technically accurate under narrow definitions of payment default, systematically understates credit stress across the asset class.

When selective defaults and liability management exercises are included in the calculation, the true default rate approaches 5%. These transactions—covenant amendments, payment-in-kind toggles, maturity extensions negotiated under duress—represent economic distress even when they avoid formal default classification. Lenders and borrowers have strong incentives to avoid triggering default language, but the economic substance remains: borrowers cannot service debt on original terms

A recent analysis by the International Monetary Fund (IMF) provides additional context. Approximately 40% of private credit borrowers now exhibit negative free cash flow, compared to 25% in 2021. This deterioration has occurred during a period of nominal economic growth and relatively benign credit conditions in public markets. The implication is that many borrowers were marginal credits at origination, sustainable only under optimistic operating scenarios that have not materialized.

Payment-in-kind provisions, once used sparingly for high-growth companies temporarily burning cash, have proliferated. Public BDCs now receive an average of 8% of investment income via PIK rather than cash interest. This defers the day of reckoning but compounds the problem: principal balances grow while operating performance stagnates, increasing ultimate loss severity when defaults eventually crystallize.

From a research perspective, this creates severe measurement challenges. The headline default rate of sub-2% bears little relationship to underlying credit quality. Any empirical work comparing private credit default rates to public market alternatives must adjust for definitional differences. The gap between reported defaults and economic distress may be widening, not narrowing, as the asset class matures.

Perpetual Capital Structures: The First Real Test

The largest private credit managers have fundamentally transformed their business models over the past five years. Apollo, Ares, Blackstone, Carlyle, and KKR now collectively manage approximately USD1.5 trillion in perpetual capital, representing roughly 40% of their combined assets under management. If current growth trajectories persist, these firms will manage USD5 trillion in permanent capital by the end of the decade.

Semi-liquid evergreen fund structures have driven this growth. Capital inflows into these vehicles increased from USD10 billion in 2020 to a projected USD74 billion in 2025. Non-traded BDCs alone are forecast to reach USD1 trillion in Assets Under Management by 2030. This represents successful product innovation that has opened private credit to wealth management channels and retail investors who cannot commit capital for traditional 10-12 year fund lives.

But the first week of January 2026 revealed the tension inherent in these structures. Blue Owl Capital allowed investors in its Owl Rock Technology Finance Corp. (OTIC) to redeem 17% of net assets, approximately USD685 million, well above the fund's stated 5% quarterly redemption limit. The firm extended the redemption deadline from December 31 to January 8, suggesting negotiation with large redemption requests rather than mechanical processing. Blue Owl emphasized that it maintained USD2.4 billion in liquidity to accommodate requests and that fund performance "remains strong", but the precedent matters more than the specific circumstances.

Traditional closed-end private credit funds lock investor capital for the fund's life. Limited partners cannot redeem; they can only sell their positions in secondary markets, typically at significant discounts during stress periods. This structure aligns with the fundamental illiquidity of the underlying loans, which may take years to work out if borrowers experience distress. There is no maturity mismatch, both assets and liabilities are long-dated and illiquid.

Evergreen funds with quarterly redemption rights introduce bank-like fragility into an asset class less liquid than traditional bank loans. If redemption requests exceed the stated limits, as occurred at Blue Owl, managers face three options: (1) honor redemptions by selling assets, potentially at fire-sale prices that mark down remaining investors' NAV; (2) enforce gates and suspend redemptions, destroying the product's value proposition; or (3) break their own rules and allow additional redemptions, as Blue Owl did.

None of these options is attractive. The first creates downward NAV spirals. The second eliminates the liquidity feature that justified retail distribution. The third establishes precedent that gates are negotiable, encouraging future redemption requests.

The Fundamental Question: Committed Capital or Redeemable Deposits?

This brings us to the core analytical question. The private credit industry has raised approximately USD1.5 trillion in recent years under the banner of "permanent capital." Managers argue this structure enables patient, long-term lending that banks, constrained by mark-to-market accounting and regulatory capital requirements, cannot provide.

But if 5% quarterly redemptions become structural rather than exceptional, the capital is not permanent. It more closely resembles bank deposits: nominally stable, but subject to runs if confidence deteriorates. The critical difference is that bank deposits benefit from deposit insurance and central bank liquidity facilities. Private credit funds have neither.

The academic literature on banking fragility emphasizes how maturity mismatches create vulnerability to runs. Banks fund long-term illiquid loans with short-term demandable deposits. This works during normal periods but collapses when depositors lose confidence and demand withdrawal simultaneously. Diamond-Dybvig (1983) demonstrated that even solvent banks can fail if depositors coordinate on running.

Evergreen private credit funds face an analogous problem. If underlying loans would take three years to liquidate in an orderly fashion, but 20% of investors can redeem quarterly, the structure is fundamentally unstable. It depends on redemptions remaining staggered and manageable. Once redemptions spike—as they did in Q4 2025—the mechanics break down.

The defense offered by managers is that private credit loans, unlike public securities, can be held to maturity without mark-to-market volatility. There is no forced selling. This argument has merit during isolated credit events. But it fails during systemic stress when multiple borrowers simultaneously struggle and new capital inflows dry up. Managers then face the choice between suspending redemptions (breaking the product promise) or selling assets at stressed valuations (crystallizing losses).

Implications for 2026 and Beyond

Three implications emerge from January's developments.

First, geographic arbitrage will continue driving capital allocation. European private credit should see sustained inflows as long as bank lending remains constrained. U.S. markets will face ongoing competitive pressure unless banks again retreat from leveraged lending. This suggests U.S. private credit returns will compress toward broadly syndicated loan returns, eliminating the illiquidity premium that historically justified allocations.

Second, manager dispersion will widen dramatically. Firms with genuine restructuring infrastructure, operating in geographies with authentic financing gaps, funded by truly patient capital, will generate acceptable risk-adjusted returns. Those lacking any of these three attributes will face redemptions, portfolio deterioration, and compressed economics. The homogeneous performance that characterized 2020-2024 is ending. For researchers, this creates the cross-sectional variation necessary for meaningful empirical analysis.

Third, regulatory attention on evergreen structures will intensify. The Bank of England has already launched stress tests of private equity and private credit. The Australian Securities and Investments Commission elevated private credit to a dedicated 2026 enforcement priority. If retail redemptions continue at elevated levels, U.S. regulators will scrutinize whether these products are being marketed appropriately to non-institutional investors who may not understand the liquidity risks.

The next 18-24 months will test whether "permanent capital" was genuine financial innovation or regulatory arbitrage disguised as product development. Blue Owl's January 2026 decision to honor super-normal redemptions suggests managers believe maintaining confidence is worth breaking stated rules. That calculation may prove correct in the near term. But it establishes a precedent that could accelerate redemptions in future stress episodes, creating exactly the fragility the permanent capital structure was meant to avoid.

The fundamental tension remains unresolved: private credit has sold itself as patient, long-term capital while simultaneously offering quarterly liquidity to attract retail flows. These objectives are incompatible under stress. 2026 will reveal which promise managers prioritize when forced to choose.

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