Goldman Sachs: Will private credit trigger a new financial crisis?

# Zhang Yaqi

Source: Wall Street CN

Goldman Sachs believes that despite the turmoil in the private credit industry caused by redemption restrictions, the sector accounts for only 4% of private nonfinancial credit. Even in an extreme scenario with a 10% default rate, the drag on GDP would be only about 0.2% to 0.5%, making a systemic crisis similar to 2008 unlikely. Core risks are concentrated in the 25% exposure to the software sector and uncertainty around AI premiums.

Against a backdrop of intensifying turbulence in private credit and major asset managers imposing redemption limits in succession, Goldman Sachs economist Manuel Abecasis has offered a clear assessment: pressures in private credit are unlikely to trigger large-scale macroeconomic spillovers on their own, but a broader tightening in financial conditions would pose a more significant threat.

Alternative asset managers including Apollo, Ares, and BlackRock have recently restricted investor redemptions amid a surge in requests from retail and high-net-worth clients, sparking widespread concern over whether a private credit crisis could spread. In a report framed around stress tests under default scenarios, Goldman Sachs systematically evaluates the potential impact of private credit losses on economy-wide loan volumes and GDP growth. It finds that even in an extreme scenario where the default rate rises to 10%, the hit to GDP would be just 0.2%–0.5%.

The report also notes that corporate lending by banks has accelerated recently, corporate balance sheets remain broadly healthy, and growing investment demand related to AI will support the credit market, partially offsetting the impact of tighter private credit conditions. Goldman Sachs emphasizes that the greater risk lies in a widening of overall credit spreads driven by uncertainty over the AI outlook, or a more broad-based tightening in financial conditions.

However, more pessimistic voices exist in the market. UBS recently raised its baseline forecast for private credit default rates to 15% — well above Goldman Sachs’ worst-case scenario — and warned of potential “chain defaults” and widespread contagion risks, in sharp contrast to Goldman’s conclusions.

## Private Credit Size: Rapid Growth but Still Peripheral

According to Goldman Sachs’ report, the private credit industry holds roughly $1.7 trillion in corporate leveraged loans, representing about 4% of total credit to the private nonfinancial sector.

Goldman Sachs points out that despite rapid expansion in recent years, the sector remains small relative to the overall financial system. For comparison, residential mortgages accounted for roughly 45% of private nonfinancial sector credit before the 2008 financial crisis, far above the current share of private credit. The bank uses this to push back against market comparisons between today’s private credit stresses and the 2008 crisis, including similar analogies previously made by Bank of America strategist Michael Hartnett.

Regarding current loan performance, available indicators cited by Goldman Sachs show that as of the fourth quarter of 2025, overall loan performance was roughly in line with averages since 2023. The share of underperforming loans in private credit portfolios rose slightly in the second half of 2025 but remained below 2023 levels. Furthermore, while the share of loans with payment-in-kind (PIK) features has increased, this mainly reflects greater use of PIK terms in newly originated loans, rather than borrowers being forced into PIK due to financial stress; the share of voluntary PIK toggles has remained stable recently.

## Software Exposure: The Most Concentrated Risk Point

The disruptive impact of the AI wave on the software industry has been a key catalyst for the sharp deterioration in sentiment in private credit markets recently. Goldman Sachs equity analysts estimate that the software sector accounts for just under 25% of loan portfolios in business development companies (BDCs). At the same time, leverage ratios at technology borrowers are higher than at other types of private credit borrowers, and recovery rates on software loans may be lower than in other sectors — partly because software firms lack tangible assets to serve as loan collateral.

Beyond software exposure, fraud incidents in a small number of large loans and credit vulnerabilities accumulated during the recent rapid expansion of private credit have also heightened concerns over deteriorating loan quality. Goldman Sachs also notes that interconnectedness between the private credit industry and other financial institutions has continued to deepen in recent years: insurers have significantly increased their allocations to the sector while adding leverage and relying more on short-term wholesale funding; banks have forged tighter links with private credit through loans and credit lines.

## Stress Tests: Quantifying Impact Under Two Scenarios

Goldman Sachs ran stress tests under two default scenarios, quantifying impacts by combining equity analysts’ observations of interinstitutional connectedness, credit strategists’ conservative estimates of recovery rates, and the willingness of different financial institutions to curtail lending amid shocks.

In the **baseline scenario**, the private credit default rate rises from roughly 1% in 2025 to 3%–4% (the lower end of leveraged loan default rates in historical credit cycles), generating about $45 billion in additional defaults. At a 40% recovery rate, this translates to roughly $25 billion in actual losses. Under this scenario, the drag on outstanding loans would be about 0.2% or less (equivalent to roughly 1.5% or less of total new loan flows), and the drag on GDP would be around 0.1%.

In the **severe downside scenario**, the default rate rises to 10% (the upper end of the historical range for leveraged loans), generating about $150 billion in defaults. At a 40% recovery rate, this implies roughly $90 billion in losses; if software loan recovery rates fall to 30%, losses would expand to about $105 billion. Accounting for knock-on impacts on banks and other private credit funders, this scenario could reduce private nonfinancial sector credit by $350–$400 billion, equivalent to 5%–6% of total new loan flows, with a GDP drag of 0.2%–0.5%. For context, private sector loan flows fell roughly 30% during the 1990 recession and savings-and-loan crisis, and roughly 55% after the 2008 financial crisis.

Goldman Sachs also notes that loan contraction does not translate proportionally to output declines, as unaffected lenders can partially fill the gap. Using a vector autoregression model built on its financial conditions index and the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS), the bank estimates that a 1% drop in the loan-to-GDP ratio corresponds to a roughly 0.3%–0.4% decline in real GDP.

## Controversies and Limitations Behind the Optimistic Conclusion

Goldman Sachs’ conclusions rest on several important assumptions, explicitly noted in the report: a rapid resolution to the Iran conflict without triggering a global stagflationary recession, and no bursting of the AI bubble. The report also acknowledges that if the shock triggers widespread market panic and leads lenders to voluntarily retrench beyond direct exposures and regulatory constraints, indirect effects could exceed the range estimated by current models.

Goldman Sachs adds two technical caveats: first, private credit loan defaults do not directly translate to monetary losses in the same way as other loan types, as private credit contracts typically include more covenants that can trigger default protection before borrowers miss interest payments; second, private credit loans currently hold a relatively senior position in borrowers’ capital structures, meaning higher private credit default rates would likely coincide with heavy losses in other asset classes — a negative dynamic for markets overall.

In contrast to Goldman Sachs, UBS recently set its baseline scenario at a 15% default rate — well above Goldman’s extreme case — and warned of potential “chain defaults” and broad contagion effects. The sharp divergence between the two firms reflects high uncertainty in market assessments of the risk trajectory for private credit, and suggests investors should exercise caution when relying on institutional forecasts.

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