The Iran War is Killing Private Credit

As the world grapples with the intensifying war in the Middle East, where U.S. and Israeli forces have been pounding Iranian targets since late February, another storm is brewing far from the battlefield. This one is in the quiet corridors of global finance, specifically in the realm of private credit. It’s a sector that has grown enormously over the past decade, promising steady returns to everyday investors. But recent events show how fragile that promise can be, especially when geopolitical shocks meet economic headwinds.

The United States and Israel are into the second week of active warfare, with Iranian retaliatory missiles targeting U.S. bases in the Gulf and Israeli positions. Iran has raised a red flag of revenge over a key mosque and issued ultimatums to Gulf states to expel American forces. The Strait of Hormuz, through which a fifth of the world’s oil passes, is under threat, with tanker traffic slowing and reports of attacks on ships. Oil prices have surged: WTI crude hit above $110 mark, up from around $71 just days before the strikes. This isn’t just about energy; it’s rippling through markets, wiping out trillions in value and stoking fears of broader economic pain.

The private credit market—a $2 trillion industry that lends funds directly to companies that can’t easily tap public markets—is showing cracks. This week, major players like BlackRock and Blackstone faced a rush of withdrawal requests from investors spooked by the chaos. BlackRock’s $26 billion HPS Corporate Lending Fund, known as HLEND, received requests for $1.2 billion, or 9.3 percent of its value, but capped payouts at 5 percent, leaving $580 million deferred. Blackstone’s $82 billion BCRED fund saw a record 7.9 percent in requests, about $3.8 billion, and met them all by raising its limit and injecting $400 million from the firm and employees. Blue Owl, another big name, has dealt with similar pressures, including halting redemptions in one fund and buying back shares in another.

These aren’t isolated incidents. Private credit has boomed because it offered retail investors access to higher yields from loans to mid-sized firms, often with the allure of liquidity like a stock. But those loans are long-term, typically three to seven years, and tied to assets that aren’t easy to sell quickly. When panic hits—as it has with oil jumping over $90 and markets tumbling—investors want out. Funds then face a tough choice: dump assets at a loss or restrict withdrawals. Most are choosing the latter, exposing the mismatch at the heart of this model.

The Iran war didn’t start this problem, but it accelerated it. Higher oil prices mean higher costs for companies, squeezing their cash flow. In addition, there are signs of a U.S. economic slowdown: the Atlanta Fed’s GDPNow estimate for the first quarter was slashed to 2.1 percent on March 6, down from 3.0 percent just days earlier. The Labor Department February jobs report, released on March 6, showed a contraction of 92,000 jobs, with unemployment ticking up to 4.4 percent. This combination—rising energy costs and cooling growth—hits private credit hard, as many borrowers are in sectors like manufacturing or tech that feel the pinch first.

Commentators are sounding alarms. Analysts at Fitch note default rates in private credit climbing to 5.8 percent by January, the highest tracked, with warnings of up to 15 percent if sectors like software falter. Economists argue that while private credit eases pressure on traditional banks, its illiquidity creates risks for insurers and pensions heavily invested there. On X, discussions highlight how funds like those from BlackRock and Blackstone are gating redemptions, with users noting, “You get out when they let you.” This opacity—manager-reported values, delayed data—makes it hard to gauge the full extent, but it’s clear: distress is building, with more payment deferrals and restructurings.

Regulators bear some responsibility here. They’ve allowed these products to spread to retail investors through structures like business development companies, often without enough emphasis on the risks. The pitch was “democratizing” private markets, but that shouldn’t mean ignoring basic truths about liquidity. Investors, too, need to remember there’s no such thing as high returns without trade-offs. Many assumed these funds were as safe as bonds, but they’re not.

The Middle East war could drag on, with UN reports of ongoing strikes and Iran’s regime activating succession plans. If the Strait of Hormuz stays disrupted, the price of oil could climb higher, worsening the squeeze on borrowers. Private credit managers might face more redemptions, forcing sales that reveal true asset values, which are potentially lower than reported. For the broader economy, this could mean tighter credit for mid-sized firms, slowing growth just as the United States shows weakness.

The Iran conflict is a reminder that global events don’t stay contained. They echo through markets in very unexpected ways.

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