A swelling wave of redemptions has driven Moody’s Ratings to revise its outlook for private credit investment vehicles to negative, after holding the line at stable for over two years.
The ongoing exodus from nontraded vehicles, which make up 60% of the sector’s assets, and elevated leverage in their publicly-traded counterparts are key drivers of the credit grader’s revision, according to a report Tuesday. The “disruptive force” presented by artificial intelligence is expected to compound the group’s worries and put it “on defense” in the coming year, Moody’s analysts wrote.
An abrupt reversal in the first quarter spurred the first ever net outflow for the sector, Moody’s said. Before artificial intelligence advances set off alarm bells over the durability of software securities, the vehicles had experienced robust net inflows as recently as the third quarter of 2025.
For the nontraded business development companies, it’s “an unfavorable dynamic that is unlikely to turn around” in 2026, Moody’s said. Recent redemptions have forced some funds to impose caps on withdrawal requests and threaten to create a cascade of investors trying to exit their positions.
“The proration of investors and headlines of elevated redemptions may incentivize other investors to seek redemptions,” report authors, led by Clay Montgomery, a vice president in Moody’s Ratings’ private credit team, wrote.
Sentiment has been souring across Wall Street.
Private credit funds have emphasized growth at the expense of investment fundamentals in recent years, Jeff Aronson, the co-founder and managing principal of Centerbridge Partners, said on Bloomberg Television Tuesday.
“Things that credit investors should care about, terms like safety or risk, getting your money back, you don’t hear much about,” Aronson said.
He added that growth is going to be hard to come by from here. “Imagine if you are an investor, you see your fund has been subject to 10% or 15% or even higher redemption requests. Are you going to put your own money in, recognizing that they may take my money and pay someone else?”
But Aronson said that, for experienced investors, the market turbulence is “the exact moment to lean in.”
Non-traded BDCs are well equipped to mitigate outflows given last year’s strong equity capital flows and sufficient capacity to raise secured funding from banks and collateralized loan obligations, Moody’s said.
Publicly traded peers, on the other hand, have “maximized leverage, leaving limited room for error,” according to the Moody’s report. BDC stock prices have also suffered, with many trading at a discount to net asset value, a dynamic that limits deleveraging for managers and increases the likelihood of share repurchases.
In order to revise its view and return the sector to a stable outlook Moody’s said it would need to see the investor exodus slow, better leverage and liquidity, as well as a moderation in asset quality risks for the public BDCs.
Written by: Rene Ismail — With assistance from Olivia Fishlow, Dani Burger, and Matthew Miller @Bloomberg
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