Forty minutes with five distressed and opportunistic credit managers at the Private Debt Summit at SuperReturn International 2026 yielded a sharper, more unanimous diagnosis than panel moderator Matthias Kirchgaessner expected: the deepest stress may not be in private credit but upstream in private equity. Here, he examines what the discussion revealed about direct-lending defaults, sponsor pressure, software exposure and the opportunities emerging in distressed and special situations.

Every prior cycle had a playbook. The panel asked what happens when private credit is the dominant lender. Image: Plexus Research.

In the preview piece I wrote ahead of Berlin, I elaborated on the issues I was observing and asked where the real stress was hiding and what was quietly building beneath the surface. Forty minutes on stage with five of the most active distressed and opportunistic managers in the market produced an honest discussion, sharper, more uncomfortable, and more unanimous than I expected. The stress is not in private credit. It is upstream of it. The panel pointed at private equity (PE) and refused to soften the framing.

The arguments were strong enough, and the conviction genuine enough, to deserve a broader audience than the room could provide. This is what stood out, and what I think every LP left thinking about.

The stress is not in private credit. It is upstream of it.
Matthias Kirchgaessner, Managing Partner, PLEXUS Research

The big bad guy in the room

The panel's collective view was that the credit conversation has the diagnosis backwards. The panel cited more than 14,000 private equity firms globally, the bulk concentrated in North America and Europe. The estimate offered on stage was that only around 9,000 of them will survive what was described as a Darwinian shakeout. Plain and simple, a firm that cannot return capital will not raise the next fund, which leaves the underperformers squeezed from both sides, no carry in sight for the team and no successor fund to keep the franchise alive. What follows is not a dramatic collapse but a quiet crumbling, as investors move on and the talent drifts to the survivors. That pressure is visible beyond the panel: Forbes has examined the rise of private equity “zombie firms”, while Bain notes that a growing number of companies are effectively trapped in portfolios.

The deeper number is the one the audience should have written down. Leander Christofides, Co-CIO of the Global Special Situations Group at J.P. Morgan Asset Management, framed the scale of the potential problem this way: approximately USD 17tr sits in private markets today, with private equity at its core alongside private credit, real estate and infrastructure. Preqin placed global alternatives AUM at USD 16.8tr at the end of 2023, broadly consistent with that order of magnitude, although the definitions are not identical. If 20% of that pool were impaired, the affected assets would approach USD 3.5tr. In Christofides’s comparison, subprime was of a similar scale and the Chinese real estate overhang larger still. That comparison is directional rather than like-for-like: the US subprime mortgage market was approximately USD 1.3tr in 2007, while China’s property inventory overhang remains elevated and estimates of its scale vary by scope. The order of magnitude is the point.

The mechanism is well understood. In Christofides’s assessment, many PE portfolios were assembled at acquisition multiples of around 15x EBITDA but could command only 10x to 12x in today’s market. PitchBook's data illustrate the dispersion rather than prove the markdown: US companies valued at USD 1bn or more were acquired at a median 16x EBITDA in 2025, compared with 10.8x for businesses valued below USD 1bn. In the panel's telling, sponsors cannot sell at carrying value, cannot IPO into a closed window, and cannot return capital to limited partners (LPs) who are now openly resisting recommitments. The panel presented the liability management exercise (LME) boom, the payment-in-kind (PIK) extensions, the dividend recaps off direct-lending books and the continuation vehicles as the same instrument viewed from different angles: a blanket pulled over the problem. In the panel's assessment, private equity has done a remarkable job pointing the finger at private credit and skillfully diverting attention from its own problems. In reality, we are talking about sponsor survival capital, dressed in different uniforms.

The loss math, stripped of politeness

The teaser argued that a direct lending LP who modelled 60 basis points of expected credit loss is sitting on a different investment than they thought. The panel made the arithmetic concrete. Fitch’s US Private Credit Default Rate reached 6% in April 2026 and remained at that record level in May, up from 5.7% in March. Against that published measure, the panel argued that underlying private credit default rates may already be running between 6% and 8%, while some reported measures remain in the 2% to 3% ballpark. Morgan Stanley’s Private Credit Tracker 4Q25 – As the Credit Cycle Turns separately forecast that direct-lending defaults could reach 8% as software disruption flows through portfolios. Separate public Morgan Stanley analysis has also examined software-credit risk, although it does not substantiate the more severe trajectory laid out from the stage: 12% to 13%. That was a panel scenario, not a published market forecast. For recovery severity, the panel argued that recoveries, when they come, are arriving at 30 to 35 cents on the dollar. J.P. Morgan’s Default Monitor reported an FY2025 first-lien recovery rate for broadly syndicated loans of 34.8 cents, providing a reference point—but it is a BSL proxy rather than a private-credit recovery rate. Using the BSL proxy and assuming 1.3x debt-to-equity leverage, a figure consistent with CalPERS’ direct-lending portfolio review and the BDC average cited by Chicago Atlantic - the panel’s illustrative calculation implies equity-level losses of approximately 9% to 12% at the 6% to 8% default range. That puts the central estimate at around 11% per year, enough to wipe out a full year of expected returns. If defaults reached the panel’s severe-case range of 12% to 13%, the same structure would produce losses in the high teens. The panel contended that LPs had underwritten just 60 basis points. The delta between those numbers will be the story of this cycle.

What was striking was that nobody on the panel pushed back. The structural framing offered alongside was equally pointed. One panellist contrasted the public US market, where defaults peaked at 6% even with pandemic-era bailouts, with emerging markets, where he said defaults ran at 2% to 3% despite no government aid. In his assessment, the substantial gap did not come from credit quality. It came from far more conservative underwriting, and hence lender discipline, in emerging markets. Everyone in direct lending claims to do only the good deals. Someone in that roughly USD 2tr pool is taking the not-so-good ones, and it does not take much imagination to see the average losses eventually surfacing.

The denial dynamic

The most useful colour from the panel was on how the gap between reported default rates and actual credit deterioration is maintained. The mechanism is not technical. It is social.

The scene described from the stage was a phone call that happens privately. The private credit lender sees the numbers slipping. The sponsor rings and tells the lender to stay in their box, that the situation is being fixed, that more equity is coming, probably. The numbers continue to deteriorate and, surprisingly, no new equity arrives. Eventually the sponsor concedes and tells the lender to take the keys, but by then there is little left to enforce on, at least where covenants never existed or had no teeth.

The rational response is to extend, amend and pretend, and keep the headline default rate quiet.
Matthias Kirchgaessner, Managing Partner, PLEXUS Research

In the panel's telling, the lender is structurally disincentivised to enforce earlier. Enforce against a sponsor and, the panellists argued, the sponsor blacklists you. The rest of the sponsor community follows. The next deal never arrives. The rational response is to extend, amend and pretend, and keep the headline default rate quiet. The cost of that rationality shows up later, when recoveries collapse, and the credit is finally recognised. That is how, in the panel’s view, 30 to 35 cents on the dollar could become the new normal. Panellists also pointed to recent cases that made headlines and saw even more drastic revaluations, from a net asset value (NAV) of 100 to zero overnight. Whether those stay isolated or become a more frequent pattern remains to be seen.

Sponsors are now indifferent buyers

The unexpected counterpoint, and the most commercially interesting thread of the afternoon, was what the panel described as a dynamic that did not exist eighteen months ago. According to the panel, sponsors who need distributions to paid-in capital (DPI) to raise their next vintage have become indifferent to the cost of capital they pay to unlock it. They are forced sellers and forced buyers of expensive paper at the same time.

The practical consequence reshapes how scale lenders deploy. Managers described lending not into broken businesses, but against the best assets in a sponsor's portfolio, because those are the assets the sponsor does not want to sell but does need to monetise. In some ways it is easier to sell your winners.

The deployment numbers behind this framing are large. One manager on the panel described approx. USD 4bn of capital placed year-to-date into these solutions structures out of a single regional franchise alone. One panellist pointed to multiple European transactions in the USD 700mn to USD 2bn range that had closed this year on the same model, with more coming to market. The phrase used from the stage was “generational opportunity”.

The mid-market mechanics travel in parallel. Buy syndicated debt at 60 cents in the secondary, agree the back-end reinstatement at 80 with the sponsor, and monetise the gap. Or provide preferred equity on a high-conviction credit and deleverage the operating company (“OpCo”). The return targets discussed on stage were mid-teens with a first-lien margin of safety, and 20% plus for junior positions in the same structures. Target-rich was the operating phrase, and nobody at the table disputed it.

Software: Extending the inevitable

The teaser flagged software as the next energy crisis (remember 2015), but bigger. The panel split, productively, on what to do about it.

One end of the table held the cleanest defensive view. Zero software exposure, and a pipeline nearly as empty. The reasoning was that the market is undergoing a structural revaluation that even a panel of credit specialists cannot accurately forecast over the next three months, let alone the next three years. An asset class with a genuinely open terminal value question is not an investment. It is kind of a bet. Better to wait for the shakeout.

The other end held the trader's view. The forced selling in the February to March 2026 window, when collateralised loan obligation (CLO) managers were proactively offloading software loans to avoid Triple-C concentration breaches, produced names trading 10 to 15 points below fundamental value. That was a buying window. The broader cohort was framed as a liquidation play, free-cash-flow-generating businesses now trading at one to two times earnings, where enterprise values have come down, but cash generation has not collapsed.

The synthesis I took from the two views is that software is not a single trade. It is a barbell. The high-conviction free-cash-flow names are bought in the stressed strike zone below 70 cents. Much hairier, the structurally impaired names- equity down to zero, debt down to 15 cents- need up to two years from here, with the maturity wall of 2028 looming, and a completely different toolkit to work those out.

HALO made real

The practical mechanics of the HALO framework (Hard Assets, Low Obsolescence) came into sharp focus on the panel, from two directions at once.

Source from a forced or motivated seller. Wrap structural protection around a hard asset. Underwrite cash, not multiples.
Matthias Kirchgaessner, Managing Partner, PLEXUS Research

One manager described how, in emerging markets, the structure goes around the corporate entirely. Bankruptcy-remote intermediary trusts. Ring-fenced carve-outs of physical assets. Contracts assigned directly, with cash collected off the top before it touches the corporate. In that manager's account, the lender is structurally senior to the company, not just contractually senior. He described mid-teens dollar returns coming out of underlying corporates leveraged at three times, not because the corporate is strong, but because the structure does not depend on it.

In developed markets, the same instinct surfaces through banks. One manager on the panel deployed approx. USD 2.5bn over the last three months, primarily into bank debt, describing banks as the sleeping giant that has now woken up, well capitalised enough to recognise stress on their books and willing to sell. That manager made the model concrete with a recent European infrastructure transaction: paper sourced from banks at 55 cents, a tier-one sponsor injecting fresh equity behind the debt, an underlying asset valued at 40 cents of replacement cost, a three-year hold, and a base case approaching two times money.

The pattern is the same in both stories. Source from a forced or motivated seller. Wrap structural protection around a hard asset. Underwrite cash, not multiples.

What LPs should actually do

The closing round was where the panel was most candid, and from my perspective most useful for the allocator audience.

Manager selection was framed as the singular variable. Panellists argued that large-cap firms which built their direct lending franchises around asset deployment rather than investing produced predictable underwriting compression. The next cycle will sort that out. Counter-cyclical exposure was recommended alongside it, unsurprising from a distressed and special situations panel, not as a crash call but as portfolio insurance.

The most quoted line of the afternoon came almost in passing. One panellist, a career credit investor, noted that his personal book does not contain a single sponsor-backed direct lending fund. Most of his money is in credit. None of it is allocated in the PE structures the industry spends most of its energy marketing. If a career credit investor votes this way with his own money, allocators should at least run the comparison, risk-adjusted payout profiles across the two, with an open mind.

All in all, there are a few points anyone in the room should have taken with them. First, LPs should challenge their direct lending funds on their valuation practices. Second, focus on money multiple, not internal rate of return (IRR). The bells-and-whistles leverage games inflate IRRs in ways that obscure the actual return on capital. Third, the next vintage of performing senior lending will be one of the better ones, precisely because the discipline has returned. Fourth, be deliberate about manager selection and allocate now to special situations, capital solutions and distressed, but allocate with eyes open.

The show of hands

The closing question, which I put to the panel deliberately, was whether each of them believed they would outperform private equity on a risk-adjusted basis over the next cycle. Five hands went up. No hesitation whatsoever.

The cycle they described will not announce itself.
Matthias Kirchgaessner, Managing Partner, PLEXUS Research

That gesture, more than anything else from the forty minutes, deserves to sit with the audience. It is either the most confident statement of conviction by an opportunistic credit panel in a decade, or it is the most self-interested. The honest answer is that it is probably both. The cycle will sort it out.

My teaser ahead of the panel ended by asking how to position ahead of a cycle everyone can see coming but no one can precisely time. The panel answered it in part. On the five-phase map of a distressed cycle, the consensus placed the US between phase two and phase three, refinancing stress tipping into default acceleration, with Europe still sitting a step behind in phase two.

But the more useful answer was not the phase number. It was everything the panel did around it. They named the patient. They priced the loss. They drew the map of where opportunistic capital can credibly be deployed today, and where it cannot.

That is enough to act on. The cycle they described will not announce itself. It will show up first in a maturity wall nobody refinanced in time, in a recovery rate that comes in worse than the model, and in a sponsor who finally runs out of runway. The next conversation, the one we should have over the coming quarters, is not whether the cycle arrives. It is about what breaks first and about being positioned before it does. At Plexus Research, Matthias Kirchgaessner is a private debt and credit specialist, due diligence expert and active member of the private credit community. He is a regular moderator at private credit conferences, including the distressed panel at SuperReturn International’s Private Debt Summit in June 2026.

At Plexus Research, Matthias Kirchgaessner is a private debt and credit specialist, due diligence expert and active member of the private credit community. He is a regular moderator at private credit conferences, including the distressed panel at SuperReturn International’s Private Debt Summit in June 2026. Figures, forecasts and views attributed to the panel reflect estimates and opinions shared during the session and should not be read as forecasts by SuperReturn.