The Growing Strain in Private Credit and How Private Equity Can Survive and Thrive

What once felt like a reliable financial engine is becoming more complicated. And the firms that adapt fastest will likely come out ahead.

How We Got Here

The roots of today’s private credit strain go back to the dramatic shifts that followed the COVID pandemic.

As banks pulled back from riskier lending and interest rates began rising, private credit markets stepped in to fill the gap, and grew exponentially. For example, Ares Management, which calls itself “a leading global alternative investment manager,” was a $600M business when it IPO’d in 2014. By 2025, it had grown almost tenfold to $5.6B revenue.

Unconstrained by traditional banking regulations and able to move faster, private credit quickly became a primary source of leveraged financing for private equity transactions.

Capital flowed into the sector, growing from $2 trillion in 2020 to an estimated $3.5 trillion in early 2026. Lenders expanded rapidly, and private equity sponsors used the financing to acquire, scale, and exit companies at strong returns.

Investors flocked to private credit, expecting (and receiving) outsized returns on their money.

For several years, the model worked extremely well.

No more.

Persistent inflation, higher borrowing costs, geopolitical instability, and the acceleration of artificial intelligence have dramatically slowed exits, creating ripple effects throughout the private markets ecosystem.

The Liquidity Pressure Building Beneath the Surface

When exits slow, capital becomes trapped.

Private equity firms depend on portfolio company exits whether by sale or IPO to return capital to lenders and limited partners and justify future fund formation. Without exits, PE funds are becoming more selective about committing new capital. That reticence is exacerbated by pressure from their own limited partners to maintain performance.

The result is a tightening loop: Portfolio companies are dealing with higher borrowing costs. Lenders are becoming more cautious. Investors are scrutinizing valuations more closely. And sponsors are facing longer holding periods than anticipated.

The irony is that the overhang continues. Committed capital is not the issue. PE funds have all kinds of capital to invest, in theory.

Signs the Market Is Paying Attention

The Financial Times reports that private credit managers are watching their shares plunge and being forced to justify portfolios as markets increasingly question valuations and hidden risks.

Concerns are rising that default rates in private credit could double in the coming years.

Meanwhile, investors are growing impatient. Some are even cashing out at a loss.

And the fallout is spreading beyond private markets. Volatility in bank stocks has reflected broader questions about how traditional lenders and private credit markets are interconnected.

The pressure is no longer hypothetical or something investors can think about as “maybe” happening in the future. It is beginning to show up in capital markets behavior.

One Possible Way Out of the Mess: Operational Excellence that Drives Value

PE funds once assumed exits would come eventually; that assumption no longer holds. Multiple expansions are fading, leverage is more expensive, and markets are demanding real, operational improvement to justify a good exit.

Holding companies longer isn’t value creation for many family offices, investors, and PE funds. Operational transformation is. And that is the space where interim leadership excels.

Why Interim Executives Are Today’s Strategic Imperative

In this environment, experienced interim leaders aren’t a luxury; they are mission-critical.

Here’s why:

They Deliver Immediate, Hands-On Operational Impact

Family offices and PE funds have never had the mindset of later-is-better, or allowing management a long ramp-up time to improve. Interim executives step in fast and begin driving performance improvements that are exit-relevant, even when markets aren’t cooperating.

When the sources of funding and cash necessary for operations and growth is not available – namely, more borrowing – it’s time to get scrappy and creative with objective outside leadership expertise brought to bear immediately. Because none of us can control markets, but we can control our actions and behavior to be ready.

They Turn Volatility Into Execution Certainty

Whether the challenge is margin pressure, refinancing stress, or pivoting product strategy, interim leaders bring battle-tested experience across industries. They know what works under strain and they are wired for change.

They Align Portfolio Operations With Exits

Smooth operations, clean earnings, and clear growth pathways materially improve buyer confidence. In tight markets, that’s worth multiple points of valuation.

Case in point: we were called into a PE fund’s poorly performing portfolio company with the instructions to our InterimExecs RED Team CEO to “break no glass.” In other words: don’t make big waves.

The end result? Disastrous.

The fund knew things were bad but feared the unknown. The reality turned out far worse.

The current market is flashing alarms that the time is now.

Bottom Line: Speed + Leadership Distinguishes Winners From Losers

In this PE crisis, firms that rely on strategy alone will lag. But firms that pair strategy with proven execution leadership will outperform.

Reach out to us for a confidential conversation about how our vetted RED Team interim and fractional executives can drive the change your portfolio companies need in this difficult environment. Our battle-tested CEO, CFO, and COO leaders can be onsite in as little as 48 hours, assessing the need, creating the plan, and leading the change.

Read More:

• Family Office Costs Rising? Why an Interim Executive Can Be the Answer in Uncertain Times
• 8 Questions to Ask to Decide Whether Your Family Office Would Benefit from Interim, Long-Term Fractional, or Outsourced Leadership
• Private Equity Operating Partner vs Interim Executive: Which Do You Need?
• Case Study: Private Equity Software Executive Chairman

FAQs

Is there a private credit crisis right now?

The private credit market is experiencing increased scrutiny and demands from investors and limited partners for liquidity as higher interest rates, slower exits in private equity, and mediocre borrower results and valuations begin to show systemic effects.

While the market remains large and active, many analysts expect more selectivity from lenders and potentially higher default rates in the coming years.

Why are private equity fund exits slowing down?

Exits are slowing due to higher interest rates, lower valuations in public markets, cautious buyers, and economic uncertainty.

Uncertainty here is not a theoretical. For example, if the portfolio companies have been involved in manufacturing in any way, they face long-term tariff and regulatory unknowns. If the portfolio company is involved in software or SaaS, there has likely been a permanent reset in valuations due to the rapid increase in AI capabilities.

Many firms are holding portfolio companies longer than originally planned while waiting for better market conditions.

How does private credit pressure affect portfolio companies?

Portfolio companies face higher borrowing costs, refinancing challenges, and increased performance expectations from investors and lenders. EBITDA is still the watchword. That means operational efficiency and profitability are more important than ever.

Why are interim executives useful for private equity portfolio companies?

Interim executives bring immediate and vast leadership experience, allowing firms to accelerate operational improvements, stabilize companies during transitions, and prepare businesses for refinancing or exit without the delay of a traditional executive search or ramp-up period for the new hire.

When should a private equity firm bring in an interim or fractional executive?

Sponsors often bring in interim and fractional leadership during periods of rapid change, performance challenges, refinancing preparation, leadership gaps, or when a portfolio company needs to accelerate its operational strategy quickly.

What distinguishes InterimExecs RED Team from legacy headhunters and executive recruiters claiming they can also do interim?

InterimExecs RED Team is the pioneer in the interim and fractional marketplace in the United States. That longevity has allowed us to rigorously rank, score, and screen 12,000 interim and fractional executives so your private equity fund, family office, or shareholders don’t have to wade through mediocre or average candidates.

We’ve done all the work over the past 20 years so you don’t have to. We can cut to the chase: bring you the right operational executive right now, without delay. Excellence at speed. We’re not faking it like most headhunters and executive recruiters who still think permanent search is the same, and the candidates must be the same. They are not.

Call or text us to see how we can help: 847.849.2800