I’m not a finance guy. I want to be upfront about that.

But those who know me also know that I’m very interested in economics and finance.

So, lately I’ve been paying more attention to what’s happening in markets, partly out of curiosity and partly because it affects everyone whether you like it or not. So bear with me while I try to make sense of something that caught my attention this week.

BlackRock is limiting withdrawals from one of its private credit funds.

You can read more here or on any other news website. Not just BlackRock. Morgan Stanley and Blue Owl Capital are doing the same thing with similar products. And when three of the biggest names in finance make the same move at the same time, it’s probably worth paying attention.

What even is private credit?

Okay, quick detour, because I had to look this up too.

Private credit is basically lending that happens outside of banks and public markets. A company needs money, but instead of going to a bank or issuing public bonds, it borrows directly from a specialized fund. That fund raised money from investors and now lends it out to companies, collecting interest in return.

This whole sector exploded after 2008. Banks got burned by the subprime mess and became way more conservative about who they’d lend to. Private credit funds saw the gap and jumped in: “Banks won’t give you money? We will.”

Fast forward to today and it’s a multi-trillion dollar market.

So far so good. The problem is how these investments actually work.

The illiquidity trap

When you buy a stock or a public bond, you can sell it whenever you want. There’s a market, there are buyers, you click a button and you’re done.

In private credit, there’s no secondary market. You can’t just exit when you feel like it. The fund manager decides when redemptions are allowed, on their own schedule. And the “value” of your investment is estimated, not discovered by the market.

The weird side effect of this is that the price of your investment doesn’t fluctuate daily, so it feels stable (like house prices). So it feels safe. But the risk is still there, just hidden. You can’t see it until everyone tries to exit at once.

Here’s where it gets bad

Default rates on these private loans have been climbing. We’re talking from roughly 2.6% to nearly 5% over the past few months. And when defaults rise that fast, investor confidence collapses even faster.

BlackRock reportedly saw withdrawal requests hitting around 10% of the fund’s value in a short window. The problem is that the money was already lent out. You can’t just make up liquidity. So they did what funds do in this situation: they slowed withdrawals down.

Yeah, it’s basically a bank run, but in private fund.

What about the Stock Market?

Let’s say that everything is fine tho, so even if the private credit market is not stonks at all, the stock market is fine as it is completely unrelated. Right?

This is where it gets interesting, and where I think everything is connected (or will be).

Did you notice that in the last days the S&P 500 has been struggling? Well, we know that part of that is geopolitical for sure. The Iran conflict has pushed oil prices up a lot. Big jump in a short time, that’s true for sure.

So, like I said, it might be completely unrelated to private credit. But I think it’s actually not.

Let me break down what I’m thinking (maybe I’m wrong):

  • Higher oil price means higher inflation (more or less).
  • Higher inflation means central banks keep rates elevated instead of cutting them.
  • Higher rates means the companies that borrowed through private credit funds are paying more to service that debt.
  • More of them default.
  • Which means more investors panic about their private credit funds.
  • Which means more withdrawal requests.

See a pattern there?

When investors can’t get their money out of illiquid funds, they sell what they can sell. Stocks. ETFs. Liquid bonds. Everything that has a button to click. That wave of forced selling could drag the S&P down even more.

It’s not one crisis. It’s the same crisis slowly showing up in different places at once.

The takeaway

Is this 2008? Honestly, I don’t know. I guess nobody does right now. But the warning signs are there:

  • withdrawal freezes
  • panic redemptions
  • forced selling (possibly) cascading into public markets

That’s all I can say. I’m just a software engineer trying to understand why my index funds are doing weird things.