FSB Flags $2 Trillion in Private Credit Risk: What Accredited Investors Must Know

On May 6, 2026, the Financial Stability Board released its Report on Vulnerabilities in Private Credit — the most authoritative regulatory assessment of a market that has grown to $1.5–$2 trillion in assets. The FSB, which comprises central bankers, regulators, and finance ministers from G20 nations, did not mince words. Secretary General John Schindler stated that default rates are rising, that when broader measures including selective defaults and distressed exchanges are counted "the picture becomes more concerning," and that market participants "may have only partial information about correlations and concentrations across loan portfolios and markets." If you hold a private credit fund, a BDC, or a non-traded perpetual vehicle, this report is about your money.

What the FSB Report Actually Found

The numbers in the FSB report are specific, and they matter. The global private credit market held $1.5–$2 trillion in assets at the end of 2024. The U.S. accounts for roughly $1 trillion of that total, and the market is dominated by large asset managers acting as general partners. Five asset management groups alone control one-third of all private credit and private equity loan commitments.

Leverage is higher than headline figures suggest. Borrowers in private credit funds report debt-to-EBITDA ratios of 5–6x. But UBS Credit Research — cited directly by the FSB , found that after accounting for common EBITDA adjustments, true leverage is closer to 7x. EBITDA add-backs inflate earnings, which compresses the reported ratio and makes loans appear safer than they are.

Default rates tell a similar story. The outright default rate is approximately 1% , a figure often used by fund managers as a selling point. But when the FSB includes selective defaults and distressed exchanges, the rate climbs to approximately 5%. That is comparable to the U.S. high-yield bond market, which is publicly rated, publicly traded, and priced daily. Private credit is none of those things.

Borrower quality is deteriorating at the base. About 75% of private credit borrowers have EBITDA below $100 million , squarely in the middle market. Ten percent of middle-market CLO borrowers cannot cover their interest costs from operating cash flow, per S&P Global data cited by the FSB. The IMF's 2025 Financial Stability Report found that 40% of private credit borrowers have negative free cash flow, up from 25% in 2021. That is not a minor drift. That is a structural change in borrower quality over four years.

Payment-in-kind loans now make up 12% of the private credit market, roughly double their share in 2022. Research on U.S. BDC loans, cited by the FSB, found that PIK toggle usage is associated with a 1–2 percentage point increase in the probability of delinquency in the following quarter , on top of an unconditional delinquency rate of 3%. Retail investors now hold 13% of private credit assets under management, up from near-zero a decade ago. Banks have $220 billion in official credit line exposure to private credit funds; commercial estimates put the real figure between $270 billion and $500 billion.

The Redemption Crisis Playing Out Right Now

The FSB report is a forward-looking warning. But the redemption data from early 2026 is current and documented. In Q1 2026, investors submitted approximately $20 billion in redemption requests across major private credit funds. Only about half was honored. The table below shows what happened at the largest affected vehicles.

Fund	AUM	Redemption Requests	Outcome
Cliffwater CCLF	$33B	14% of NAV	Payouts capped at 7% (stated limit: 5%); half of requests unfulfilled
Blackstone BCRED	$82.5B	$3.8B / 7.9% of NAV	All requests honored; Blackstone injected $400M of firm and executive capital
BlackRock HLEND (HPS)	$26B	$1.2B / 9.3% of NAV	$620M distributed; approximately half of requesting investors locked out
Morgan Stanley North Haven	N/A	10.9% of NAV	$169M returned; payouts capped at 5%
Apollo Debt Solutions BDC	N/A	11.2% of shares	5% honored; each redeeming investor received ~45 cents on the dollar of requested capital
Blue Owl OBDC II	$1.6B	N/A	Permanent closure of quarterly redemption window on February 19, 2026

These are not isolated events at small or poorly managed funds. Blackstone, BlackRock, Morgan Stanley, Apollo, and Blue Owl are among the largest and most sophisticated asset managers in the world. The gating happened anyway. Blackstone's willingness to inject $400 million of its own capital to avoid gating BCRED was exceptional. Smaller fund sponsors do not have that option.

The structural parallel is the Blackstone Real Estate Income Trust (BREIT) in December 2022, when retail redemptions caused the fund to cap withdrawals at $12.8 billion. The 2026 private credit cycle is structurally identical , semi-liquid vehicles holding illiquid assets, facing redemption pressure that exceeds the fund's ability to pay. The dollar amounts are larger this time.

What a PIK Toggle Is and Why It Matters

A PIK toggle is a loan feature that lets a borrower choose to pay interest not in cash, but by adding the interest amount to the outstanding principal balance. The borrower "toggles" between paying cash and paying in kind , usually at their own discretion. The lender receives more paper, not more money.

Here is why that matters to you as an investor. When a company switches to PIK, it is telling you , without saying so directly , that it does not have enough cash to service its debt. The loan balance grows each period instead of shrinking. The company becomes more leveraged over time, not less. And because private credit loans are not publicly traded or rated by major agencies, the fund's internal marks may not reflect the deterioration until it is severe.

The FSB-cited research found that PIK toggle usage carries a 1–2 percentage point higher probability of delinquency in the following quarter. On a base rate of 3%, that is a roughly 33–67% increase in delinquency probability. Twelve percent of private credit loans currently have PIK features. Publicly traded BDCs now receive an average of 8% of their investment income via PIK , meaning a growing share of the income you see in fund reports is not cash. It is paper that compounds the borrower's problem and delays recognition of the loss.

PIK usage has roughly doubled since 2022. That doubling is happening at the same time that 40% of borrowers have negative free cash flow. I read those two data points together as a signal, not a coincidence.

The Retail Investor Problem

The FSB report states plainly: "Retail investors may not fully understand the illiquidity of the asset class, which may amplify redemption requests during stress episodes." That is a regulatory body saying, in formal language, that some people who bought these funds did not know what they were buying.

Retail investors now hold 13% of private credit assets under management. A decade ago that figure was near zero. The growth came through semi-liquid vehicles , perpetual non-traded BDCs and similar structures that offer quarterly redemptions at up to 5% of NAV. The pitch is straightforward: institutional-quality private credit returns, with periodic access to your capital.

The mismatch is structural. The fund's assets are multi-year term loans to mid-sized, unrated companies. There is no liquid secondary market for those loans. When many investors request redemptions at once, the fund cannot sell assets quickly to raise cash. It can only distribute what it has on hand, gate the rest, or , as Blackstone did with BCRED , find outside capital to bridge the gap.

The FSB identifies this as a potential amplifier of procyclicality. When markets get rocky, retail investors who misunderstood the liquidity terms try to exit. The gates come down. Investors who see gates elsewhere try to exit before their own fund gates. The cycle feeds on itself. Bank of Canada Governor Tiff Macklem, who chairs the FSB's top risk committee, stated directly that private credit is not suitable for everybody. That is a meaningful statement from someone in his position.

Banks carry $220 billion in official credit line exposure to private credit funds. Commercial estimates put that number between $270 billion and $500 billion , a gap of up to $280 billion that regulators cannot currently reconcile. If private credit funds face simultaneous redemption pressure and borrower defaults, those bank credit lines become the transmission mechanism to the broader financial system. FSB Chair and Bank of England Governor Andrew Bailey wrote in the Financial Times that "direct bank exposure to funds may be limited, but indirect connections are extensive."

What the FSB Is Actually Asking For

The May 2026 report is a vulnerability identification exercise, not a rulemaking. The FSB proposed three action items and explicitly stopped short of new rules, capital requirements, or investor protection mandates.

First, the FSB wants to close data gaps. It proposed approximately 24 core surveillance metrics covering market size, borrower leverage, redemption frequency, retail and institutional ratios, sector concentration, and cross-border activity. Currently, no globally harmonized definition of "private credit" exists. The EU's AIFMD regulation places it in a residual catch-all category. U.S. regulators identify private credit funds through name-matching algorithms across multiple filings. The FSB cannot measure what it cannot define consistently.

Second, the FSB wants deeper analysis of interlinkages , particularly the connections between private credit, private equity, and insurance. PE-backed insurer liabilities have grown from $67 billion in 2012 to $900 billion today. If those insurers hold private credit assets and face their own redemption or claims pressure, the feedback loop runs in both directions.

Third, the FSB wants member jurisdictions to share supervisory approaches: how they govern valuation, how they assess exposure aggregation, and how they treat the use of non-public credit ratings. No binding timeline was set. No specific agency was tasked with implementation. The FSB's authority is advisory , it identifies risks and urges action, but it does not write law.

The FSB made no direct comparison to 2008. Analysts have, and I understand why , the structural echoes are there. But Morgan Stanley's own analysts noted that an 8% default scenario, which they consider a stress case, would be significant but not systemic. The distinction between 2008 and today is that fund-level leverage is lower than bank balance sheet leverage was in 2008. That distinction matters. It does not mean the current situation is not a serious risk to individual investors , it means the risk is more concentrated at the fund level than spread across the banking system.

What Accredited Investors Should Do With This Information

If you are currently invested in private credit funds, or evaluating one, the FSB report gives you a specific set of questions to ask. These are not abstract due diligence suggestions. They are the exact vulnerabilities the FSB identified.

Ask your manager what percentage of the fund's loan portfolio has PIK features. Twelve percent is the market average. If your fund is above that, ask why. Ask what percentage of reported income is PIK versus cash. Public BDCs average 8% PIK income share , in a private fund with less disclosure, that number could be higher and harder to find.

Ask what the fund's actual redemption history has been in 2025 and 2026. Ask whether the fund has gated, capped, or restricted redemptions. Ask what the fund would do if requests exceeded 5% of NAV in a single quarter. The answers to those questions tell you more than the prospectus.

Ask about borrower EBITDA adjustments. If the fund reports 5–6x leverage, ask what the unadjusted figure is. The FSB found that adjustments can push the real number to 7x. Ask what percentage of borrowers have negative free cash flow. Ask whether any borrowers have recently switched from cash interest to PIK.

Ask about bank credit line exposure at the fund level. If the fund uses subscription credit facilities or NAV loans, understand the size, terms, and what triggers repayment. Those are the indirect bank connections Andrew Bailey flagged.

Ask about valuation methodology. Private credit loans are typically marked internally or by small, lesser-known agencies. BlackRock's HLEND wrote a loan from par to zero in one quarter in early 2026 , a loan that had been marked at 100 cents on the dollar three months earlier. Ask whether any current portfolio companies have switched to PIK in the last two quarters, since PIK toggles are one of the few observable early-warning signals available.

Finally, be honest about your own liquidity needs. If you may need capital in the next 12–24 months, semi-liquid private credit funds with quarterly redemption caps may not match your actual situation, regardless of what the marketing materials say. The FSB's core finding on retail investors is that the mismatch between fund illiquidity and investor expectations is the risk. That risk is entirely within your control to assess before you commit capital.

The private credit market at $2 trillion is large enough to matter to the financial system. The FSB said so on May 6, 2026. What it has not yet done is mandate the disclosures or guardrails that would make it easier to assess that risk from the outside. Until that happens, the burden of due diligence falls on you.

Disclosure: This article is for informational purposes only and does not constitute investment advice, a solicitation, or an offer to buy or sell any security. Angel Investors Network and its contributors may hold positions in securities mentioned. Always consult a qualified financial adviser before making investment decisions. Past performance is not indicative of future results.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.