Private Credit Crash Sees Massive Q1 Pullback: Morningstar

Charles Paikert

18 June 2026

The bloom came off the private credit rose in the year’s first quarter, as investors withdrew a staggering $1.8 billion from the 10 largest direct lending funds. The sharp reversal in private credit demand was reported by Morningstar at the research firm’s annual Investment Conference in Chicago.

Investor fears that artificial intelligence will have negative impact on software companies drove the massive Q1 outflows, triggering the asset classes’ first real liquidity test since gaining widespread popularity, according to Morningstar analysts.

Last year’s fourth quarter net flows for Blackstone Private Credit Fund were approximately $2 billion, for example, while first quarter 2026 outflows neared $1 billion. Although Blackstone honored all withdrawals in the first quarter, the asset management giant is capping second quarter withdrawals at 5 per cent, an industry standard.

The Q1 private credit flatlining may have been a wake-up call for investors, who are discovering that “knowing the true economic cost of owning these funds is still hard to do,” said Jason Kephart, director, multi-asset ratings and global manager research at Morningstar.

Market doubles in size
Despite the private credit debacle, what Morningstar calls the “semiliquid fund market” neared $600 billion in assets in the first quarter, more than double the amount from the end of 2022, thanks to investor interest in private equity and venture capital, driven by artificial intelligence and space exploration. Real estate and infrastructure funds also showed strength.

This surge in popularity was made possible by expanding the market to investors who don’t meet accredited investor or qualified purchaser requirements. Blackstone is by far the largest semiliquid fund vendor, with a 20 per cent market share, followed by Cliffwater, Blue Owl, Ares, KKR and Apollo, who have between 7 and 4 per cent market share.

Still much to prove
But conference speakers warned that private market funds still had much to prove. “Are fund managers adding value net of fees?” asked Ankul Daga, head of private markets portfolio research at Vanguard. “If funds can’t improve investment outcomes, they will just be a fad that comes and goes.”

“There’s a lot of room for improvement,” said Kephart, citing fee disclosure and operational transparency. Beating public market return benchmarks is also a challenge. “There’s a substantial bar, and not many have met it,” said Morningstar’s US equities strategies research analyst and principal Jack Shannon.

Private market funds will eventually thrive as just another portfolio option, said BlackRock managing director Nick Nefouse. Currently semiliquid funds are in an early stage “and very disorganized,” Nefouse said. “But the markets will solve things in the next couple of years.”

The real game changer, said Shannon, will be the company that takes aim at the traditional high fees of 3 to 4 per cent for semiliquid funds. “Who,” he asked, “will be the Vanguard of private markets?”