Large asset managers are facing severe liquidity pressure in their private credit funds. BlackRock capped withdrawals from its $26B HPS Corporate Lending Fund after investors requested $1.2B in redemptions (9.3% of assets) - exceeding the fund’s 5% quarterly limit. Other big names included Blue Owl Capital and Morgan Stanley. But the list is growing every day.

Why are big funds restricting withdrawals? According to Christian Stracke, president of the US$2.3 trillion asset manager Pimco, sloppy underwriting standards in private credit market may be a big reason.

But there may be more reasons for their woes. They are facing major cashflow problems for a variety of reasons – ranging from over leverage, impact of high tariffs, rollercoaster stock market to the Iran conflict.

Faced with these multifaceted challenges, the funds have limited options to ensure long term stability and protect investors. Hence the clamp down on redemptions.

The private credit market has grown explosively since the 2008 crisis, with a market size of ~$1.8 - $3 trillion globally. It must be noted here that private credit borrowers are primarily small to mid-sized, privately held companies, often backed by private equity sponsors, seeking financing for growth, acquisitions, or leveraged buyouts.

For years the model worked well. Investors were attracted by high yields in a world of ultra-low interest rates. Borrowers benefited from quick access to capital and flexible lending structures. But the system was built during an era of cheap money and abundant liquidity.

But all that has changed dramatically with the Federal Reserve’s rate hikes since 2022. This has sharply increased borrowing costs across the economy. Many private-credit loans carry floating interest rates, meaning companies must now pay significantly more to service their debt.

Majority of the companies financed by private credit funds are small to medium manufacturing and industrial suppliers, logistics companies and retail businesses. They have been seriously impacted by the high tariff regime. Most of these companies are heavily dependent on imports from China and other Asian countries due to favorable input / production costs.

At the same time, fresh geopolitical developments are adding new economic pressures. The Iran conflict has pushed oil prices higher, raising the risk of another inflationary shock. High energy prices ripple through the economy, increasing transportation costs, raising manufacturing expenses, and reducing consumer purchasing power.

For heavily leveraged companies, particularly those financed through private credit, the combination of high tariffs, higher interest rates and rising energy costs can be particularly damaging.

The consequences are becoming visible. Default rates among US private-credit borrowers reached roughly 9.2 percent in 2025, one of the highest levels recorded in the sector. Rising defaults inevitably raise concerns about the stability of funds holding those loans.

Are major funds doomed to fail? While pundits differ, many do not see an imminent collapse, although they do see increasing risks.

The Federal Reserve now faces a delicate balancing act. They most likely will embark on a cautious easing cycle - gradually lowering interest rates while maintaining a close watch on liquidity of banks.

For decades, the United States benefited from three powerful tailwinds: globalization, cheap energy, and ultra-low interest rates. Each of these forces is now weakening. Trade fragmentation and tariffs are reshaping supply chains. Geopolitical rivalries are disrupting energy markets. And interest rates are higher than they were in the decade following the global financial crisis.

For the global economy too, the implications are profound. The United States remains the anchor of the international financial system. Any sustained slowdown in its growth would ripple through global trade, capital flows, and commodity markets.  The brewing crisis in the private credit market will most likely cause a slowdown in the US and the global economy.

The geopolitical conflicts dominating today’s headlines may therefore be masking deeper undercurrents in the US economy.  It is difficult to say if the private credit crisis is a canary in the coal mines signaling a widespread fallout all over the banking and financial services sector. But it is certainly a serious development that should caution the powers that be to course correct.