Once a relatively niche asset class, private credit has, over the past few years, become a buzzword in corporate finance. Fueled by a favorable interest rate environment, tighter bank lending constraints, and expanding private credit strategies, the private credit market in 2024 grew to reach almost $2 trillion in assets under management. With a rapidly increasing number of new entrants, a broadening investor base, and heightened competition, private credit has moved deeper into the mainstream, bringing with it a range of more diverse and creative solutions, such as asset-based lending and specialty loans.

Much of private credit’s growth occurred during a time in which interest rates stayed close to zero. As a result, it is widely believed that private credit has yet to experience a “real” credit cycle. That may soon change, however, as signs of distress within the private credit arena are beginning to emerge. If a downturn does begin to take hold, a key question will be whether the contentious liability management transactions that have become prevalent in broadly syndicated loan structures will become more prevalent in private credit, an asset class known for being relatively tight-knit and relationship-driven.

Signs of Distress

There are numerous signs of distress. In February 2025, the default rate in U.S. private credit rose to 5.7%—up from 4.7% at the end of 2024, 5.3% at the end of 2023, and 0% in 2022, according to Fitch Ratings. More pointedly, some private credit deals have ended up as restructurings, both in- and out-of-court. Four recent examples are International Data Group, Alacrity Solutions, Pluralsight, and Zips Car Wash—each of which involved lenders taking the keys from the companies’ private-equity sponsors:

Just in the past few weeks, a group of private lenders to International Data Group, a market intelligence company, agreed to convert some of their debt to equity in order to provide the company with runway. The deal involved adjusting part of the loan to allow payment-in-kind, which allows the borrower to defer cash interest payments.

In February 2025, Alacrity Solutions, which manages insurance claims through a network of adjusters, entered into an out-of-court restructuring that involved the sponsor relinquishing control to Alacrity’s direct lenders. Following the transaction, the go-forward entity’s capital structure will consist of a $450 million term loan and approximately $250 million in preferred equity. In addition to converting approximately half of their loans into equity, Alacrity’s lenders contributed roughly $175 million in new money, split between a $75 million revolver and a $100 million delayed-draw term loan.

Last summer, Pluralsight, an online education company, engaged in a drop-down transaction involving its sponsor, in which the company moved certain intellectual property into a new restricted subsidiary. The sponsor provided a $50 million loan to the new entity that was secured by a lien on the IP, the proceeds of which were transferred to Pluralsight and used to fund an interest payment to its existing lenders. The deal proved unsuccessful in bridging Pluralsight through a turnaround plan, so the sponsor eventually agreed to relinquish control of the company to its lenders in an out-of-court recapitalization. Unlike many liability management exercises, the Pluralsight drop-down—while viewed as the first liability management exercise in private credit—was not challenged by any of its lenders. This may have been due, at least in part, to the fact that Pluralsight did not take the more aggressive step of moving collateral outside of the restricted group and that the parties were able to reach agreement on a consensual restructuring.

In February 2025, Zips Car Wash filed for chapter 11 with a pre-negotiated agreement that its private-equity sponsor would hand over the keys to Zips’ lenders in exchange for the company’s repayment of 75% of their loans. Zips entered bankruptcy with $654 million in debt and $1 million cash on hand, and its lenders agreed to loan an additional $30 million to fund the restructuring. Zips’ filing has been described as “one of the biggest bankruptcies ever in the private credit space.”

Many blame rising interest rates for the increase in liquidity issues, though remain hopeful that the recent decline in rates will stave off the need for more widespread and substantial restructurings.

“Lender-on-Lender Violence” in Private Credit?

Although these signs of distress have raised the question as to whether liability-management exercises and so-called lender-on-lender violence will become more commonplace in private credit, there are several reasons to think things may not unfold in this way:

• Deals in the private credit market are traditionally built on relationships, which makes sponsors less inclined to take aggressive maneuvers against lenders.
• Private credit deals often have more bespoke, closely negotiated credit agreements with stronger protections for lenders than broadly syndicated loans, which typically contain more flexible, standardized language.
• To mitigate the transaction costs, litigation risk, and business disruption that accompany complex liability-management exercises involving some or all lenders, observers expect private credit lenders to opt for change-of-control or balance-sheet restructurings.
• The perception of ratings agencies or public markets is not a factor in private credit, alleviating some pressure to engage in creative liability-management exercises when a borrower is in trouble.
• The lack of secondary market in private credit limits the ability of third parties to acquire controlling positions in a company’s debt and then aggressively pursue their own investment thesis.

At the same time, there are countervailing factors to the above: increased competition in the private credit arena may erode some of its relationship-driven quality and, additionally, lead lenders to accept looser terms, making agreements less bespoke. Further, increased distress may tempt increasingly desperate market players to adopt creative maneuvers. So, while there may be numerous reasons why private credit will be spared the adversarial dynamics that now frequently characterize syndicated loan structures, the bottom line is that both the level of distress in the market and how private credit payers react to it remain to be seen.

Private Equity Report Spring 2025, Vol 25, No 1