Private Credit Managers and Funds Hit by “SaaSpocalypse” and Face Scrutiny on Valuation and Retail Access and Suitability

BDC Concerns Intensify Amid Software Sector Exposure and Late-Cycle Stress

Perscient's semantic signature tracking language expressing worry about Business Development Companies' private credit risks registered a z-score of 5.4 this week, rising by 1.0 over the past month. This represents the largest positive change among all tracked signatures. The catalyst appears unmistakable: a sudden reckoning with the sector's substantial exposure to software companies now facing existential questions from artificial intelligence.

Shares of business development companies fell sharply last Monday as concerns over the group's widespread exposure to software sparked a renewed selloff. The carnage continued through the week, with Blue Owl's tech-focused BDC trading at its lowest level on record. Alternative asset managers, investment banks, and BDCs all absorbed losses as investors fled software stocks following new AI tools from startup Anthropic that sparked panic about the viability of traditional software business models.

The concentration risk is substantial. Software makes up approximately 17% of BDC investments by deal count according to PitchBook data, second only to commercial services. Barclays research indicates that software now accounts for about 20% of investments in BDCs, compared to around 10% in 2016. UBS analysts estimate that 25-35% of private credit portfolios face elevated AI disruption risk, with exposure most acute in technology and business services sectors.

The warnings from industry luminaries have been building for months. DoubleLine Capital CEO Jeffrey Gundlach publicly warned in November 2025 that some companies providing private credit are making "garbage loans." JP Morgan CEO Jamie Dimon expressed concerns that direct lending standards had become too lenient. These concerns now appear prescient: FS KKR Capital's non-accruals stood at 5% of its total investment portfolio at amortized cost at the end of Q3 2025, prompting Fitch to lower its outlook to negative.

Beyond the headline software exposure, the structural dynamics are troubling. As one Reuters analysis noted, the risk extends beyond valuations to the credit plumbing itself: if investors run from quarterly-liquid private credit vehicles, funds may gate or sell assets, prices drop, CLO triggers trip, borrowing costs rise, and buyouts freeze. Blue Owl Technology Income, one such BDC, had redemption requests equivalent to 15% of its shares in the fourth quarter of last year despite a strong track record.

While Perscient's semantic signature tracking language expressing worry about alternative asset managers' private credit concentration declined by 0.7 over the month to 5.0, the shift suggests that media attention has narrowed specifically toward BDC concerns rather than broader alternative manager exposure. Credit performance across KBRA's rated BDC universe remained generally solid in Q3 2025, although signs of late-cycle softening have begun to emerge with widening dispersion across platforms.

Valuation Opacity and Covenant Erosion Draw Regulatory Attention and Market Scrutiny

The concerns plaguing BDCs connect to deeper structural questions about how private credit assets are valued and protected. Perscient's semantic signature tracking language claiming that private credit valuations are fictional or manipulated rose by 0.6 over the past month to a z-score of 2.8. Simultaneously, the signature tracking language alleging that managers use loose covenants to obscure dangers climbed by 0.4 to 3.5.

The Department of Justice has publicly warned about "creative" marks and divergent valuation practices in private portfolios, while a high-profile SEC inquiry into Egan-Jones Ratings has placed the integrity of private credit ratings under a spotlight. These regulatory signals arrive as market participants grapple with headline bankruptcies including First Brands and Tricolor. The First Brands episode became a flashpoint for critics of private credit, with its bankruptcy leading to fraud charges against founder Patrick James and his brother Edward. JPMorgan CEO Jamie Dimon subsequently warned that "cockroaches" will likely emerge once economic conditions deteriorate.

The covenant erosion trend has reached levels that prompt uncomfortable questions. Across leveraged loans broadly, over 90% of senior loans now carry no meaningful covenants. Even in private credit, especially larger club deals that compete with syndicated loans, maintenance covenants have become rare. Fewer than 10% of loans above $500 million include them.

While the headline default rate in private credit has remained below 2%, once selective defaults and liability management exercises are taken into account, the "true" default rate approaches 5%. As one commentator observed on social media, anyone who has spent time in credit has been debating the same issues for years: good PIK versus bad PIK, aggressive EBITDA add-backs, and credit documents that steadily loosened as more capital crowded into the space. Cliff Asness has been making this point for some time under the banner of "volatility laundering," highlighting how private markets can obscure risk by avoiding mark-to-market discipline.

If stubbornly high inflation slows the pace of rate cuts, it will likely require more wrenching adjustments in marks. Morgan Stanley's outlook notes that inflation has exceeded the Fed's 2% target for five consecutive years, with that goal likely to continue eluding policymakers. Yet investor appetite for private credit remains undeterred even as warnings mount over looser loan approval and risk-assessment practices.

Retirement Account Access Debate Intensifies as Interval Fund Concerns Rise

The structural concerns around valuations and covenants take on heightened significance as private credit increasingly reaches toward retail investors and retirement accounts. Perscient's semantic signature tracking language expressing worry about interval funds' private credit holdings stands at 6.5, the highest z-score among all tracked signatures. Meanwhile, the signature tracking language asserting that alternative investments are becoming available to retirement accounts registered a z-score of 2.3, though it declined by 0.3 over the month.

On August 7, President Trump issued an executive order to "democratize" access to alternative assets for 401(k) investors. After extensive lobbying by industry giants, the US recently gave regulatory approval for private credit managers to sell to the roughly $13 trillion defined contribution market. Private credit firms are preparing to reach everyday investors by launching new vehicles more compatible with 401(k)s and other retirement accounts. Managers last year launched 41 evergreen funds dedicated to private credit, according to Preqin data.

US retail allocation to private credit currently stands at roughly $0.1 trillion but is projected to grow at an annualized rate of nearly 80% to reach $2.4 trillion by 2030. Interval funds saw assets grow to nearly $450 billion by mid-2025, a 16% increase from year-end 2024. Moody's expects that assets under management will exceed $2 trillion in 2026 and approach $4 trillion by 2030, noting that volatility could grow as the Main Street retail investor assumes a bigger role.

Interval funds can invest 100% in illiquid assets like private credit while offering quarterly liquidity at approximately 5% repurchases, with pro-rata allocation if redemptions are exceeded. Putting direct lending investments in an interval fund structure creates an inherent tension: interval funds require liquidity, but private credit is illiquid. Semi-liquid vehicles such as interval funds and non-traded BDCs have already exhibited queueing, gates, and NAV discontinuities when stress hits.

SEC Commissioner Caroline Crenshaw recently remarked that "as calls for retail investor access to private markets accelerate, I am concerned that we are headed for a high-speed collision, with Main Street retail investors left without airbags." The Economic Policy Institute has warned that some retirement savers might experience life-altering losses if retirement plan sponsors and advisers steer them into risky and hard-to-value investments.

Social media commentary has been pointed. One observer noted that "everyone is realizing why private credit has pushed so hard recently to dump this stuff into boomer 401ks." Another recounted discovering that a friend's advisor had allocated 23% of his retirement portfolio to private equity and credit funds, necessitating an uncomfortable introduction to the concept of interval pricing where certain funds are only priced monthly or quarterly.

Perscient's semantic signature tracking language predicting that retail investors will bear losses from private credit remained relatively stable at 1.1, rising only by 0.1. This suggests that the media narrative around retail investor losses has not yet intensified proportionally despite the retail access expansion.