Hedge funds flag growing private credit risks as Fitch’s default rate hits a record 6.3%

Hedge funds are flagging growing risks in private credit as interest rates rise¹. They point to high rates that persist and to debt maturities in 2027 and 2028, which spark fears of deeper market strains².

About a third of US private credit loans have followed private equity money into the software industry over the last few years, adding to the risks¹.

Defaults are already rising. Fitch’s private credit default rate reached 6.3% in the third quarter, the highest quarterly reading on record, up from 6% in the prior period³. The record comes as hedge funds warn that high rates will persist².

Why it matters to investors

Private credit is tied to the banking system. Bank lending to non-bank financial intermediaries has reached $1.7 trillion, according to the Boston Fed, and private credit funds and business development companies are the largest borrowers⁴. That figure measures banks’ exposure to the wider non-bank sector, in which private credit funds and business development companies are the biggest borrowers⁴. Stress in private credit would therefore not stay inside the funds themselves.

Banks react to elevated risk by tightening credit terms and reducing lending, according to one assessment of borrowing costs after the midterms⁵.

The concentration in software is a specific concern, and one hedge funds highlight¹. With about a third of loans in that industry¹, a downturn among software borrowers would hit a large share of portfolios at once.

Money is still flowing in. Blackstone closed a $14.6 billion fund as institutions back private credit⁶.

What to watch

The first indicator is the default rate. Fitch’s measure is at a record 6.3%³, and further rises would confirm the strains hedge funds are warning about^1,2.

The second is the maturity wall. Debt coming due in 2027 and 2028 is at the centre of fears of deeper strains, especially if high rates persist².

The third is the link to banks. Lending to non-bank intermediaries of $1.7 trillion⁴ means that losses in private credit could feed back into bank balance sheets, which in turn could tighten credit further⁵.

The fourth is fundraising. Institutions are still backing private credit, as the $14.6 billion Blackstone fund shows⁶, and the pace of new commitments will show whether investors are heeding the warnings¹.