Private credit market, with a focus on software credit exposures and refinancing Report Interpretation

Overview

This thematic credit report argues that concerns about private-credit redemptions have eased as fundraising and credit performance improved through mid-2026. Its central forward-looking issue is software: AI-related disruption is pressuring valuations and deal activity, while a growing refinancing need could create opportunities for specialized private-credit strategies.

Core views

Goldman Sachs says investor sentiment toward private credit improved from early 2026 even though retail-focused vehicles continued to experience redemptions. Global fundraising rose sharply to $99 billion in 2Q2026, and $33 billion had already been recorded in 3Q2026 through August 25, putting the quarter on track to meet or exceed the $45 billion raised in 3Q2025. Direct Lending accounted for 73% of the 2Q rebound, while Mezzanine and Special Situations activity was also notable. The report also points to stabilization and a modest recovery in publicly traded BDC discounts to NAV, as well as more than $19 billion of BDC issuance in the USD investment-grade market through August 27, compared with about $28 billion in each of full-year 2024 and 2025. The report attributes the recovery partly to greater recognition that retail redemption dynamics should not be extrapolated to institutional private credit. Institutional funds represent more than 85% of assets under management and do not offer the same redemption features as retail vehicles; retail redemptions themselves are typically limited to 5% per quarter. More importantly, Goldman Sachs finds no broad fundamental deterioration in 1H2026. Using the Cliffwater Direct Lending Index as a proxy for US direct lending, it reports trailing 12-month realized losses of 47bp, below the 122bp post-GFC average and modest relative to the asset class's 9.9% income return. Non-accruals improved slightly in 2Q2026 after a modest increase in 1Q, with 52% of CDLI non-accruals as of June 30 tied to 2021-2022 vintages formed in a lower-rate environment. Payment-in-kind income remained below 7% of total income for two consecutive quarters, while covenant-default and sub-1.0x interest-coverage measures also improved from levels pressured during the 2022-2023 rate-hiking cycle. Software is the report's principal area of concern and opportunity because it is the largest CDLI industry exposure at 24% and is also a major exposure in broadly syndicated loans. Private equity historically favored software for recurring revenue, predictable cash flow, low customer churn, capital-light operations, and attractive margins. Goldman Sachs believes that potential AI disruption is now challenging some legacy business models and has led to valuation pressure, although outcomes will vary materially by each company's vulnerability. Lincoln International's average fair value for software loans fell 1.3% of par from 4Q2025, with larger declines for higher-LTV loans. CDLI software exposures showed a 4.10% cumulative unrealized markdown through 2Q2026 and represented 62% of the index's total unrealized losses since year-end 2025. The report uses broadly syndicated software loans as an indicator of potential further private-credit repricing. Their weighted average bid price fell from $95.2 at year-end 2025 to $85.6 at the end of 2Q2026, before a partial recovery to $87.6 on August 25. The valuation overhang has also reduced activity: private-credit Technology deal volume fell 3% quarter over quarter and 27% year over year in 2Q2026. Jumbo private-credit lending, defined as loans of $1 billion or more, totaled just under $15 billion across 13 deals through mid-August 2026. The average disclosed jumbo deal size was $1.8 billion, while the year-to-date average spread was 463bp; recent indications for new jumbo deals were wider at 500bp to 550bp. Across broader private-credit loans, spreads widened 25-50bp since 4Q2025 for companies with $40 million-$100 million of adjusted EBITDA and by 25-100bp for software businesses. Deal restraint has also changed leverage and sector mix. For upper-middle-market and large-cap private-credit deals, total company leverage declined to 5.1x in July from 5.7x in June, the largest monthly drop since November 2024. Software represented only 4% of upper-middle-market and large-cap private-credit-funded LBOs over the preceding three months, down from 26% in the first four months of 2026. In broadly syndicated loan issuance, software's share fell from 17.6% in 2025 to 8.8% in 1H2026 across all new-issue types, and from 34.5% to 14.4% for LBOs. However, leverage has drifted higher for 2020-2021 vintages, which were originated amid low rates, active software dealmaking, and valuations that predated AI-disruption concerns. Goldman Sachs identifies refinancing access as the key future signpost. The BDC universe tracked by PitchBook LCD totals $500 billion and faces a steeper maturity wall beginning in 2028. About 17% of scheduled BDC maturities in 2027 are software-related, rising to 24% in 2028-2029; loans trading below $90 may signal refinancing difficulty. Challenged businesses without a viable path to grow into their capital structures could face lender takeovers, and lender-takeover restructurings reached $22.3 billion in 1H2026 versus $24.2 billion for all of 2025. Conversely, the report believes software refinancing may allow private credit to regain share from syndicated loans, particularly in mezzanine, special situations, opportunistic, and distressed strategies with more than $220 billion of aggregate dry powder. Private-market refinancing competition currently remains intense. Private-credit 'steals'—borrowers moving from syndicated loans to private financing—are running well below the 2024-2025 pace in 2026 because syndicated-loan conditions remain receptive. This has contributed to aggregate covenant loosening in private credit during 1H2026. The illiquidity premium has compressed but remains positive: US direct-lending LBOs were priced at roughly 114bp wider spreads than comparable broadly syndicated loan LBOs. Goldman Sachs expects private-credit pricing, terms, and conditions to become more lender-friendly if syndicated-loan markets become less accommodating to borrowers.

Analysis framework

The report first assesses private-credit sentiment through fundraising, BDC market indicators, and financing issuance. It then tests broad credit health using direct-lending loss, non-accrual, payment-in-kind, covenant, and interest-coverage data. Finally, it isolates software exposure, compares private and syndicated loan pricing and deal activity, examines leverage and maturity profiles, and treats refinancing flows as the mechanism linking credit risks to lending opportunities.

Methodology notes

• OtherSpread and Asset-Quality Analysis

  Assessment of private-credit health through realized losses, non-accruals, payment-in-kind income, covenant defaults, interest coverage, and loan spreads.

  The report uses credit-performance indicators to argue that broad private-credit deterioration has not emerged, while spread widening and weaker marks identify stress concentrated in software.

• Valuation methodsEV/EBITDA valuation

  Comparison of software enterprise-value-to-LTM-adjusted-EBITDA multiples and loan fair values.

  The report uses software valuation changes and loan markdowns to show the impact of perceived AI-related disruption and the dispersion created by leverage and business-model exposure.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Use of syndicated-loan pricing and refinancing flows as a proxy for future private-credit repricing and lending conditions.

  The report connects public and private credit markets: changes in syndicated-loan receptivity affect private-credit spreads, covenants, refinancing share, and lender bargaining power.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US private credit

  Broad credit conditions have improved as fundraising recovered and loss, non-accrual, covenant, and coverage indicators remained contained.

  Strengths

  Fundraising recovery, 9.9% CDLI income return, and realized losses below the post-GFC average.

  Weaknesses

  Retail-focused vehicle redemptions persist and private-market covenant terms loosened in 1H2026.

  Comparison

  US direct-lending LBO spreads remained roughly 114bp above broadly syndicated loan spreads.

  Risks

  Software concentration and future refinancing needs may create uneven credit outcomes.

• Software private-credit exposures

  A major private-credit exposure facing AI-related valuation pressure but also a potential refinancing opportunity.

  Strengths

  Refinancing demand may support specialized mezzanine, special-situations, opportunistic, and distressed lending.

  Weaknesses

  Loan fair values and unrealized marks have declined, while deal activity and software's share of LBO financing have fallen.

  Comparison

  Broadly syndicated software-loan bid prices fell sharply through 2Q2026 and are used as a proxy for further private-credit repricing.

  Risks

  Business-model disruption, high LTVs, leverage in earlier vintages, and refinancing challenges.

Key data

• Global private-credit fundraising$99 billion2Q2026; $33 billion recorded in 3Q2026 through August 25 versus $45 billion in 3Q2025.
• Direct Lending share of fundraising rebound73%Share of the 2Q2026 fundraising rebound.
• CDLI realized loss rate47bpTrailing 12-month rate through 2Q2026, versus a 122bp post-GFC average.
• CDLI income return9.9%Used to show realized losses remain modest relative to income generation.
• Software share of CDLI24%Largest industry weight in the private-credit proxy index.
• Software unrealized markdown4.10%Cumulative CDLI unrealized loss since 4Q2025 through 2Q2026; software represented 62% of total unrealized losses.
• Syndicated software-loan bid price$95.2 to $85.6 to $87.6Year-end 2025, end-2Q2026, and August 25, 2026, respectively.
• Jumbo private-credit activityJust under $15 billion across 13 dealsThrough mid-August 2026; average disclosed deal size was $1.8 billion and year-to-date average spread was 463bp.
• New jumbo-deal spread indication500bp to 550bpRecent KBRA DLD indications, above the 463bp year-to-date average.
• Software-related BDC maturities17% in 2027; 24% in 2028-2029Share of scheduled maturities estimated by Goldman Sachs using PitchBook LCD data.

Impact & implications

Goldman Sachs views the broad private-credit backdrop as more stable than early-2026 redemption concerns implied, but sees software as a differentiated credit-selection and pricing issue. Refinancing demand could raise distress for challenged software borrowers while creating deployment opportunities for specialized strategies if public-credit markets become less receptive.

Risks

• Legacy software business models may face additional valuation pressure and AI-related disruption, with outcomes varying substantially across credits.
• Higher-LTV software loans have experienced larger fair-value declines, and software represented 62% of CDLI unrealized losses since year-end 2025.
• The 2028 software maturity wall could expose borrowers that cannot refinance or grow into their capital structures to lender takeovers.
• Private-credit covenant terms loosened in aggregate in 1H2026 as syndicated-loan markets remained receptive to borrowers.

What to watch

• Access to refinancing for software borrowers, particularly as the BDC maturity wall steepens from 2028.
• The share of near-term maturities in stressed loans trading below $90.
• Further software repricing in broadly syndicated loans and its transmission to private-credit valuations.
• Private-credit 'steal' volumes, jumbo-deal spreads, and whether syndicated-loan markets become less borrower-friendly.
• The pace of software deal activity, leverage changes, and evidence of AI-related business-model disruption.