Separating signal from noise in a market under scrutiny
Private credit is having its first real test. After more than a decade of strong growth and largely benign conditions, the asset class is navigating sector-specific repricing, heightened scrutiny of software exposure, and investor unease about redemption limits in certain funds. For many wealth investors, this is genuinely new territory. In their March 2026 Market Insights paper, TD Wealth's Brad Simpson and Fred Wang1 deliver a clear verdict: the current environment reflects a repricing within parts of the market, not the beginning of a systemic credit event.
Equity and Credit Are Not Telling the Same Story
The most important number in the paper is a gap. Since August 2025, software equity prices have corrected by roughly 35%. Over the same period, software leveraged loans were down only approximately 7% at their lows — and that drawdown did not begin until January 2026. Two markets, one sector, two very different stories.
The divergence is not coincidental. Equity investors are repricing growth expectations and reassessing the long-term impact of AI on software business models. Credit investors are asking a more specific question: will these companies service their debt? If credit markets were truly worried about widespread distress, the evidence would appear first in loans and bonds. It has not. Senior secured loans sit near the top of the capital structure, backed by company assets or cash flows. Equity valuations can adjust significantly — and they have — before credit investors experience meaningful losses. The equity cushion beneath the debt is doing exactly what it was designed to do.
Private Credit Is Not One Thing
Possibly the most underappreciated point in the paper is structural. Private credit encompasses twelve distinct segments — from direct lending and unitranche loans to real estate debt, infrastructure finance, venture debt, distressed credit, and NAV lending. Each carries different risk characteristics, different economic sensitivities, and different return drivers. Commentary that aggregates them into a single category leads to conclusions that simply do not apply to most specific allocations.
Three structural features provide resilience across segments. Long-duration capital alignment matches investor commitment periods to loan duration, keeping manager focus on fundamentals rather than short-term volatility. Vintage diversification — loans originated across 2023, 2024, 2025 and beyond — means no single credit environment dominates a portfolio. And negotiated covenants and collateral packages give lenders the ability to engage directly with borrowers if conditions change, a structural advantage that broadly syndicated loan markets cannot offer.
On the question of contagion, Simpson and Wang are precise: some private-credit portfolios have meaningful software exposure, and the sector is undergoing a valuation reset. But with leverage generally modest and limited direct transmission into the banking system, the risks appear significant but concentrated rather than systemic.
Redemption Limits: Protection, Not Panic
No recent development has generated more investor anxiety than redemption limits in certain private-credit funds. The interpretation circulating in commentary treats these provisions as a stress signal. Simpson and Wang correct this directly: redemption limits are a core structural feature of private markets, not a symptom of fragility. Their purpose is to prevent forced sales of long-duration assets at distressed prices during periods of market volatility. By slowing outflows, these provisions protect long-term investors from the actions of short-term ones. Confusing the protection mechanism with the threat it guards against leads to precisely the wrong conclusion.
Default Rates: What the Data Shows
The most grounding data point in the paper is also the simplest. A $144.5 billion index of 691 U.S. senior secured and unitranche loans shows direct lending default rates averaging 2.43% since 2020, including the COVID spike to 8.10%. The current default rate sits at approximately 2.46% — at the long-run average, and well below what the equity narrative implies.
The broader macroeconomic backdrop reinforces this picture. U.S. GDP is projected to expand around 2% this year. Private-sector balance sheets are healthier than in prior cycles. The Federal Reserve has shifted away from quantitative tightening. Risks remain — stretched yen carry trades, Treasury basis trades, leveraged ETF positioning — but the paper's assessment is calibrated: localized credit stress could amplify volatility, but the current environment does not present conditions that typically precede a systemic financial event.
The More Challenging Phase Ahead
Simpson and Wang do not end on false comfort. The structure of private credit remains sound — but the easy decade is over. Dispersion of returns is likely to increase, and manager selection will become the primary driver of outcomes. The paper is direct about what that requires:
"Defaults happen; they're part in parcel with the credit markets. With private credit default rates as low as they are today, it's reasonable to believe they will go up. The focus should be on who minimizes them best and who drives the best recoveries when they happen. This requires human capital to originate, underwrite and execute specific deals in a conservative manner — especially when base rates are seductively near zero — in addition to being able to zoom out and manage a portfolio holistically."
Dedicated workout specialists, flexible term sheets, and value-creation teams that partner with equity holders to identify cost savings and revenue growth opportunities are the operational ingredients that separate managers in a more demanding environment. The paper's allocation conclusion follows directly: private-credit positions remain focused on established global platforms with long track records across credit cycles.
Key Takeaways for Advisors and Investors
1. The equity selloff in software is not a guide to credit risk. Credit markets price debt serviceability. The 35% equity correction vs. 7% loan drawdown gap is the capital structure working as designed.
2. Private credit is twelve segments, not one. Headlines about "private credit stress" must be interrogated for which specific segment is under discussion before drawing any portfolio conclusion.
3. Redemption limits are structural protection, not a distress signal. Long-duration assets require patient capital structures. Slowing outflows preserves value for long-term investors.
4. Realized defaults remain at historical averages. At 2.46%, direct lending default rates are at the long-run mean. Credit markets are not signalling systemic stress.
5. Manager selection is now the critical variable. As dispersion widens, the gap between strong and weak managers will be material. Deep credit experience, workout capability, and active borrower relationships define quality.
6. The strategic rationale for private credit is unchanged. Income, diversification, and access to parts of the economy financed outside traditional banking channels remain valid — the environment is just more demanding.
Footnote:
1 Brad Simpson and Fred Wang, TD Wealth. "Private Credit: Narrative Versus Reality," March 2026.
For informational purposes only. Not investment advice.*
