Private Credit Funds Face Performance Shakeout as Defaults Rise

After a stellar decade for direct lending funds, things are about to get more difficult for some private debt managers.

Returns for private credit funds — which make money by investing in illiquid assets — are likely to diverge more significantly as company defaults tick up. The pressures of higher interest rates and a slowing economy have already meant that some direct lending firms have had to take over companies in their portfolios.

That suggests trickier times ahead for funds in the $1.5 trillion industry. The sector has performed well, with US direct lenders reporting average returns of between 5.5% ...