Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—CRS report warns of potential spillover effects of private credit redemptions, (Mar 30, 2026)

By Suzanne Cosgrove

Structural features of private credit funds can make it difficult for investors to assess associated risks, contributing to redemption pressures, the report says.

A Congressional Research Insight Report released March 27, titled “Private Credit Funds Redemption Restrictions: Market Context and Policy Issues,” looks at market developments in the nearly $2 trillion U.S. private credit market, examining why there has been a recent wave of redemption requests at certain private credit funds.

Private credit refers to a type of lending provided by nonbank financial institutions, such as alternative asset managers of private funds. Although the private credit market is a fraction of the more than $120 trillion U.S. capital markets system, multiple redemptions executed in early 2026 have generated widespread concern, as well as stock price declines at some private credit fund asset managers.

Senators take note. Rising redemptions also have increased legislators’ focus on nonbank markets’ risks, particularly given possible contagion effects of nonbanks on other financial sectors. For example, following last year’s bankruptcy of Tricolor Holdings, a subprime auto loan lender, Sens. Elizabeth Warren (D-Mass.) and Jack Reed (D-R.I.) called on bank regulators to address the growing interconnectedness of nonbank sectors to the broader banking system (Banking & Finance Law Daily, Dec. 8, 2026).

A March 2026 study by the Office of Financial Research indicated that while many private credit funds use little or no leverage, a subset uses debt financing to meet working capital needs and enhance investment returns. This financing is sourced from regulated banks and nonbank financial institutions, and its effects could include a tightening of overall credit conditions, the report stated.

AI’s impact. CRS noted private credit funds are major lenders to software companies, as well as to small- and medium-size private companies that find it difficult to access bank loans and public credit markets.

As of December 2025, the funds’ exposures to software-as-a-service (SaaS) firms were estimated at around $500 billion, CRS reported. At the same time, automated software coding capabilities by artificial intelligence (AI) contributed to reduced revenue streams at the software companies, leading to a wave of redemption requests at private credit funds that lend to the sector.

Redemption caps. Investors with long time horizons may benefit from the illiquidity premium commonly associated with private credit, however, the recent rise of redemption requests suggests that some investors may not fully appreciate these illiquid features, particularly when asset valuations are uncertain. To manage liquidity pressure and reduce outflows, private credit funds have implemented redemption restrictions.

Investors in non-traded private credit funds, such as Blue Owl Capital Corp. II, North Haven Private Income Fund, and Blackstone Private Income Fund, typically have redemption restrictions at about 5 percent of the fund’s net asset value per quarter – although the $1 billion Blue Owl recently stopped its quarterly redemptions entirely.

The why of redemptions. The CRS report linked private credit investors’ redemption behavior to asset valuation downgrades and rising default risks. “One rating agency reports that the U.S. private credit default rate has reached 5.8% percent, with some observers expecting it to rise to 8% as AI disruption in the software industry continues (compared with around 4% for corporate speculative-grade bonds),” the report stated.

Unlike private equity, which holds ownership stakes and has a potentially unlimited upside, private credit investors’ returns are generally capped at certain agreed-upon interest rates. Nonetheless, when faced with portfolio company defaults, equity investors typically absorb losses before private credit investors, the CRS report found.

New policy challenges. In response to concerns about risk transparency, some industry participants have self-imposed enhanced disclosures and certain data infrastructure, CRS said.

“More broadly, as policymakers evaluate risks in the private credit market, a key objective of capital markets policymaking is not to eliminate risks but to enable effective risk monitoring and accurate risk pricing,” the report stated.

Companies: Blackstone Private Income Fund; Blue Owl Capital Corp. II; North Haven Private Income Fund

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