Investor Exodus Batters Private Credit, Squeezing Subprime Funding Markets

Stone Ridge Asset Management, which owns a fund that holds consumer and small business loans made by companies such as Block and Affirm, has been hit by a wave of redemption requests by its individual investors.

The redemption requests by investors in the private credit fund are so high that Stone Ridge Asset Management could honor just 11% of the requests. Stone Ridge has $31 billion in assets under its management at the end of 2025 making it a smaller player in private credit, The Wall Street Journal reports. 

Some companies with private credit funds are, like Stone Ridge, paying less than the redemption requests put forth by investors. For example, Cliffwater is paying investors about 50% on redemption requests made in its Cliffwater Corporate Lending Fund, The Wall Street Journal reports. 

Individual Investors Exit Private Credit Funds

A large number of individual investors are leaving private credit funds. And this affects subprime lending because subprime lenders use these private credit funds for their funding. Here’s how it works. Subprime lenders get funded by private credit funds and these funds are in turn funded by investors. 

What is driving these investor exits? One factor is that these private credit funds are underperforming and investors want out. Another reason is that investors may be spooked by the recent spate of corporate bankruptcies.

If a large number of investors cash out from a private fund at the same time, the fund may need to increase their redemption limits or borrow money to meet those redemption requests. Doing so may cause a disruption in how a private credit fund manages money affecting loan availability and liquidity issues for subprime lenders. 

Private Credit Moves into Consumer Loans

Private credit firms bought $136 billion in consumer loans in 2025, compared with just $10 billion in 2024. Firms such as KKR, Blue Owl, and Sixth Street invested in credit cards, buy now pay later debt, and unsecured personal loans, Private Debt News reports.

Despite these new investments, the private credit market has cause for concern. Morgan Stanley forecasts an 8% increase in private credit defaults driven by advances in AI that are disrupting the software industry. 

Private credit has about 19% of its investments in software companies so changes in these companies impact private lending, Bloomberg reports.

Others see a more dire forecast. UBS Group AG warned that private credit could see default rates reach as high as 15%, Bloomberg reports. Whether it is 8% or more, analysts see more defaults ahead for the private credit industry.

Shadow Default Rate Climbs Higher

Another factor to consider is the shadow default rate in private credit, which continues to climb. The shadow default rate refers to the percentage of companies in a private credit portfolio in severe financial distress that take on unexpected and extra lending conditions midway through a deal. 

This shadow default rate increased 6.4% in the fourth quarter of 2025, up from 6.1% in the third quarter of 2025, and a big increase from the 2.5% in the fourth quarter of 2021, according to Lincoln International. 

The Bottom Line

A private credit fund owned by Stone Ridge Asset Management has been hit with a number of redemption requests, and the company was only able to honor 11% of the requests. 

A large number of individual investors are leaving private credit funds, and this impacts subprime lenders that rely on private credit funds for their funding. Analysts predict private credit defaults will increase by 8% and by as much as 15% because of AI disruptions in the software industry.