What’s Going on in Private Credit?

Howard Marks argued in his April 2026 memo that direct lending followed the same pattern as every prior credit innovation: early investors earned strong returns, latecomers lowered standards to deploy capital, and the resulting excess is now being exposed. He traced the full arc from Michael Milken's high yield bond market in the late 1970s through the post-GFC rise of direct lending, arguing that roughly $2 trillion in direct loans were made over 15 years, with the private credit sector growing from ~$150 billion 20 years ago to its current scale. The specific fault line Marks identified is software debt. AI-driven disruption has reduced the equity cushion beneath software company loans, and investors in semi-liquid public vehicles — business development companies — have begun requesting redemptions. Marks noted that software debt represents 20–30% of the direct lending market, compared to only 4–5% of the high yield bond market, and that many of those loans were made to companies acquired at ~20x EBITDA with high leverage. He also connected private equity's difficulties — annualized returns of 5.8% from 2022 through Q3 2025 versus 11.6% for the S&P 500 per MSCI estimates — to the stress on direct lending, since PE-sponsored borrowers are the primary counterparties. Marks disclosed that Oaktree's direct lending exposure is roughly 20% of its performing credit assets and under 15% of overall AUM, with software exposure described as substantially below peers and predominantly first-lien. He drew a parallel to the late 1980s high yield dislocation, quoting colleague Bob O'Leary's observation that direct lending may need to pass through a full credit cycle before reaching a better place.