Private credit funds have marked down over 15% of their loans to below 80% of principal, a rough threshold for distressed debt, according to a report from MSCI.

Meanwhile, over 10% of loans held by the private credit fund industry has been written down to below 50% – typically indicating deep distress or restructuring risk.

These are the findings of MSCI’s State of Private Markets Report, which attributed much of the borrower strain to higher interest rate burdens that began in 2022.

“Three years of elevated base rates have strained borrowers’ ability to absorb higher interest burdens, and what began in 2022 as a trickle of write-downs has grown into a larger leak,” the report said.

This uptick in loan markdowns has steadily increased compared to 2022, where roughly 7% of loans were marked below 50% and under 12% were marked below 80%.

Small private credit funds have been worse off than their larger peers, with almost 20% of loans in small funds marked below 80% compared to 13% for large funds, according to the report.

Small funds also saw more deeply distressed loans, with 13% of their loans marked down to below 50%, compared to just 7% or 8% from big funds.

According to MSCI, fair-value write-downs (especially those exceeding 50%) is a signal that growing strain in private credit cannot be fully “papered over” through maturity extensions or delaying restructurings.

However, for the time being, it said that “the most acute impairments are increasingly concentrated in smaller vehicles”.

Private credit has become as a popular destination for investors seeking alternative investments, largely thanks to its infrequent valuations that dampen volatility alongside double digit returns.

However, returns for private credit funds slumped to 1.8% in the fourth quarter of 2025 from 3.7% six months prior, according to the MSCI report using data from its private capital fund indexes.

The stress in private credit suggests a “misalignment of expectations between investors and managers,” according to Luke Flemmer, head of private assets at MSCI.

“But what should not be underestimated are the genuine questions arising around the integrity of valuations, the gap between expected and realized liquidity in semi-liquid structures, and exposure concentrations that largely went undetected until dislocations in public markets made them difficult to ignore,” he said.

“As these realities suggest, the infrastructure supporting private markets has not kept pace with the quantum of capital flowing into them.”