Overview

Higher-for-longer interest rates have frozen the exit market private equity depends on, leaving roughly 33,000 unsold portfolio companies worth about $3.8 trillion. In response, the industry has leaned on continuation funds, NAV loans, and private credit to manufacture liquidity without genuine sales. This paper asks whether those tools are a real bridge or simply a band-aid.

Thesis Whether these tools are a bridge or a band-aid is not a function of the tools themselves, but of who is using them and why. The result is a bifurcation: well-capitalized, disciplined firms use them as genuine bridges, while over-levered, poorly underwritten players use them to defer losses. The reckoning is real, and it will separate the well-oiled organizations from the rest.

What the evidence shows

Most private credit is invisible — loans are privately negotiated and rarely traded. But business development companies (BDCs) file quarterly with the SEC, which makes the split observable. Two of the largest, Ares Capital and FS KKR, lend into the same asset class, the same frozen market, and the same rate environment, yet show opposite trajectories.

2.1% vs 8.1%

Non-accruals

Ares Capital sits well below the ~4% sector norm; FS KKR runs nearly four times higher — the bifurcation in a single metric.

6.0%

Record default rate

US private credit defaults hit the highest level Fitch has tracked in April 2026, with ~40% of borrowers running negative free cash flow.

−67%

A K-shaped market

Deal count collapsed in H1 2026 while aggregate value still rose — the headline recovery is concentrated in mega-deals, not the mid-market.

Why I wrote it

I wanted to test an argument against primary sources rather than commentary. The core claim rests on SEC filings — Form 10-Qs from Ares Capital and FS KKR — supported by McKinsey, Bain, PwC, Fitch, Moody's, the Financial Stability Board, and ILPA. The distinction the paper turns on, liquidity versus solvency, is the same question a lender or an allocator has to answer before underwriting anything in this market.

The falsifiable test is stated in the conclusion: watch rising PIK income and rising defaults meet the maturity wall coming due in 2027 and beyond.

Read the full paper

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Bridge or Band-Aid? Whether Private Markets Solved Their Liquidity Crisis