Goldman Sachs: Will Private Credit Trigger a New Financial Crisis?

Amid increasing turbulence in the private credit industry and multiple leading asset management firms restricting redemptions, Goldman Sachs economist Manuel Abecasis provides a clear assessment: the pressure from private credit itself is unlikely to trigger large-scale macroeconomic spillovers, but broader tightening of financial conditions poses a greater threat.

Recently, alternative asset giants such as Apollo, Ares, and BlackRock have imposed restrictions on investors due to surging redemption requests from retail and high-net-worth clients, sparking widespread concerns about whether the private credit crisis could spill over. In its report, Goldman Sachs uses a default scenario stress test framework to systematically evaluate the potential impact of private credit losses on the entire economy’s loan volume and GDP growth, noting that even in an extreme scenario with a 10% default rate, the drag on GDP would be only 0.2% to 0.5%.

The report also states that bank lending to businesses has recently accelerated, corporate balance sheets remain generally healthy, and increased demand for AI-related investments will support the credit market, partially offsetting the effects of tightening private credit. Goldman emphasizes that a bigger risk lies in: uncertainty around AI prospects could lead to wider credit spreads or more extensive tightening of financial conditions.

However, more pessimistic voices also exist. UBS recently raised its baseline private credit default rate forecast to 15%—well above Goldman’s worst-case scenario—and warned of potential “chain defaults” and widespread contagion risks, contrasting sharply with Goldman’s conclusions.

Private Credit Scale: Rapid Expansion but Still Marginal

According to Goldman Sachs, the private credit industry currently holds about $1.7 trillion in corporate leveraged loans, accounting for roughly 4% of total credit to the non-financial private sector.

Goldman notes that, despite rapid growth in recent years, the industry remains limited relative to the overall financial system—for comparison, before the 2008 financial crisis, residential mortgage loans made up about 45% of private non-financial sector credit, far higher than current private credit levels. This counters market claims equating current private credit pressures with those of 2008, including assertions by Bank of America strategist Michael Hartnett.

Regarding current loan performance, Goldman cites available indicators showing that, by Q4 2025, overall loan performance remains close to the averages seen since 2023. The proportion of underperforming loans in private credit portfolios has slightly increased in the second half of 2025 but remains below 2023 levels. Additionally, the share of loans with Payment-in-Kind (PIK) options has risen, mainly reflecting recent new loans with more PIK features in their terms, rather than borrowers being forced into PIK due to financial stress—borrowers’ voluntary shift into PIK remains stable.

Software Exposure: The Most Concentrated Risk

The disruptive impact of AI-driven software industry upheaval is a key catalyst behind the recent sharp deterioration in private credit market sentiment. Goldman stock analysts estimate that the software sector accounts for just under 25% of the Business Development Company (BDC) loan portfolios. Meanwhile, software borrowers tend to have higher leverage than other private credit borrowers, and recovery rates on software loans may be lower—due to the lack of tangible assets that can serve as collateral.

Beyond software, fraud incidents in some large loans and the credit risks accumulated during the rapid expansion of private credit in recent years also heighten concerns over declining loan quality. Goldman further notes that the interconnectedness between private credit and other financial institutions has deepened: insurance companies have significantly increased allocations to the sector, leveraging more and relying more on short-term wholesale funding; banks have formed closer links through lending and credit lines.

Stress Testing: Quantifying Impacts Under Two Scenarios

Goldman has set up two default scenarios for stress testing, combining insights from equity analysts on inter-institutional correlations, conservative estimates of recovery rates from credit strategists, and the degree of loan contraction expected from different financial institutions under stress.

Baseline scenario: private credit default rates rise from about 1% in 2025 to 3–4% (the lower end of historical leveraged loan default rates), resulting in approximately $45 billion in additional defaults, with an estimated $25 billion in actual losses at a 40% recovery rate. Under this scenario, the drag on loan stock is about 0.2% or less (roughly 1.5% or less of new loan flows), and the impact on GDP is about 0.1%.

Extreme scenario: default rates jump to 10% (the upper end of historical leveraged loan cycles), producing about $150 billion in defaults, with roughly $90 billion in losses at a 40% recovery rate; if software loan recovery rates fall to 30%, losses could reach about $105 billion. Considering the impact on private non-financial sector lenders, this could lead to a reduction of $3.5–4 trillion in private sector credit, about 5–6% of total new loan flows, with a GDP drag of 0.2% to 0.5%. For context, during the 1990 recession and savings and loan crisis, private sector credit declined by about 30%, and after the 2008 crisis, by roughly 55%.

Goldman also notes that credit contraction does not translate directly into proportional output declines—unaffected lenders can partially fill the gap. Using a vector autoregression model based on financial conditions indices and the Fed’s Senior Loan Officer Opinion Survey (SLOOS), a 1% decline in loans-to-GDP ratio corresponds to a GDP decrease of about 0.3% to 0.4%.

Controversies and Limitations Behind the Optimistic View

Goldman’s conclusions rest on several key assumptions, explicitly stating that: a swift resolution of the Iran war without triggering a global stagflationary recession, and no burst of the AI bubble. The report also admits that if shocks trigger widespread market panic and lead loan institutions to proactively tighten beyond direct exposures and regulatory constraints, the indirect effects could exceed current model estimates.

Additionally, Goldman adds two technical points: first, private credit defaults are not directly equivalent to monetary losses because private credit contracts often contain more covenants that can trigger default protections before missed interest payments; second, private credit loans currently occupy a relatively senior position in borrowers’ capital structures, meaning higher private credit default rates could overlap significantly with losses in other asset classes, posing a broader market risk.

In contrast, UBS recently presented a baseline scenario with a 15% default rate—far above Goldman’s extreme assumption—and warned of potential “chain defaults” and widespread contagion. The stark divergence between the two highlights the high uncertainty in assessing private credit risk pathways and underscores the need for cautious interpretation of institutional forecasts.

Risk Warnings and Disclaimers

Market risks are inherent; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situation, or needs. Users should evaluate whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Responsibility for investment decisions rests with the individual.