JPMorgan Chase is restricting lending to private credit funds after marking down the value of software-linked loans in their portfolios, in the latest sign that the $1.8 trillion private credit market is under serious strain. The move comes as Pimco, the world’s largest bond manager with $2.3 trillion in assets, warned that the industry is experiencing a “reckoning” driven by years of poor underwriting standards.
The bank’s chief executive Jamie Dimon recently signaled greater caution around these types of loans, saying JPMorgan was becoming more careful when lending against software assets. The decision to restrict lending follows a wave of markdowns on private credit portfolios that have rattled investor confidence across the sector.
Pimco President Calls It a Crisis of Bad Underwriting
Christian Stracke, president at Pacific Investment Management Company, did not mince words during a March 10 podcast. He described the current environment as “not just a crisis of confidence” but rather “a crisis of really bad underwriting.” Pimco analysts Lotfi Karoui and Gabriel Cazaubieilh added that direct lending “should eventually face a full-blown default cycle, one that would test its resilience to both sector-specific and macroeconomic shocks.”
The warnings are not abstract. Borrowers of leveraged loans and private credit could see a combined $75 billion to $120 billion in fresh defaults by the end of 2026, with default rates potentially climbing to 4% in private credit, according to industry estimates. While the headline default rate has stayed below 2% for several years, analysts say the “true” rate approaches 5% once selective defaults and liability management exercises are factored in.
Investor Exodus Accelerates Across Major Funds
The stress is showing up in redemption requests. Cliffwater LLC, which manages one of the largest private credit funds in the United States, is facing redemption requests exceeding 7% of its $33 billion flagship fund. BlackRock has capped withdrawals from its HPS Corporate Lending Fund at 5% after investors sought nearly double that amount.
The trouble started gaining momentum in February when Blue Owl Capital halted redemptions at its OBDC II fund. The firm sold approximately $1.4 billion in direct-lending investments across three funds to provide liquidity, returning capital to shareholders at up to $2.35 per share, roughly 30% of OBDC II’s net asset value. Blue Owl’s stock tumbled on the announcement.
AI Disruption Is Compounding the Problem
A significant portion of the market’s anxiety centers on software sector loans, which make up a large share of private credit portfolios. Roughly 50% of loans in the $235 billion software loan market carry risky B-minus or lower ratings, and rapid advances in artificial intelligence are threatening the business models of many software companies that borrowed heavily during the low-rate era.
The concern is straightforward. If AI tools can replicate what legacy software products do at a fraction of the cost, the companies behind those products may struggle to service their debt. That risk has prompted lenders like JPMorgan to reassess their exposure and tighten lending standards for funds concentrated in the sector.
What This Means for the Broader Market
Private credit grew rapidly after the 2008 financial crisis as banks pulled back from riskier lending. Direct lending now matches the broadly syndicated loan market at roughly $1.5 to $2 trillion in size and is projected to reach $3 trillion by 2028. But that growth came with loosened underwriting standards that Pimco and others say have never been properly tested.
For founders and business owners who have turned to alternative funding sources in recent years, the tightening could mean fewer options and higher costs. Private credit has become a critical source of capital for mid-market companies and growth-stage startups that do not qualify for traditional bank loans. If the default cycle Pimco is predicting materializes, borrowers across industries could face a significantly more difficult fundraising environment in the months ahead.
The question now is whether the current pullback represents an orderly correction or the early stages of something much larger. With the industry’s biggest players sounding alarms and major banks stepping back, the $1.8 trillion private credit market is facing its most serious test since its post-crisis rise.
