Albion, Illinois has a population of 1,700 people.
About 1,000 of them work at the Champion spark plug factory on the edge of town. Or they did. Last September, Champion’s parent company — First Brands Group, a private equity-backed automotive parts conglomerate carrying roughly $11 billion in debt — filed for Chapter 11 bankruptcy. On February 23, 2026, Champion Laboratories in Albion shut its doors permanently. Workers say they received no advance notice — a federal investigation has since opened into whether First Brands violated the Worker Adjustment and Retraining Notification Act, which requires 60 days’ warning before mass layoffs.
“Talk about a community that’s devastated,” said Jasper’s mayor Dean Vonderheide, whose Indiana town faces its own First Brands closure — Jasper Rubber Products, 345 workers, terminations effective April 30.
A few hundred miles east, in a suburb that could be anywhere, a different kind of conversation is happening. A financial advisor is sitting across a desk, walking a client through a product. The pitch is straightforward: 8 to 9 percent annual yield, lower volatility than bonds, access to the same opportunities that pension funds and sovereign wealth funds have always had. “Semi-liquid,” the advisor says. The client — a teacher, a small business owner, a retiree — nods. That sounds good. Who wouldn’t want that?
These two people don’t know each other exist. The piece you’re reading is about the system connecting them.
The plumbing nobody talks about
To understand what’s happening, you need a short detour through how American businesses actually get funded.
Most people assume that when a mid-sized company — a brake manufacturer in Ohio, a logistics firm in Indiana — needs capital to expand, refinance, or survive, they go to a bank. And until about 2008, that was largely true.
Then the financial crisis happened. Congress responded with sweeping new banking regulations that required traditional banks to hold more capital against riskier loans. The math changed. Lending to a private company with $80 million in revenue and significant debt suddenly looked worse on a bank’s balance sheet. Banks pulled back from what’s called the middle market — companies with revenues between $10 million and $1 billion — and they mostly haven’t come back.
That left a hole. Nearly 200,000 companies, employing approximately 48 million Americans, suddenly had fewer places to borrow. Private equity firms saw the opening. They raised capital from institutional investors — pension funds, university endowments, sovereign wealth funds — and lent it directly to these companies at rates that could reach 12 or 13 percent. The firms kept the difference between their borrowing cost and what they charged — typically several percentage points. The borrowers got their capital. The institutions got yields they couldn’t find anywhere else.
This is private credit. And for about a decade, it worked.
Why it worked — give it its due
The pitch to institutions was genuinely compelling, and not just because of the yield.
Traditional banks borrow short and lend long — they take deposits that customers can pull tomorrow and make loans that take years to repay. That mismatch is the source of nearly every bank run in history. Private credit, at least in its institutional form, solved this structurally. Capital from pension funds was locked up for five or more years. The lenders and borrowers were matched in time. No deposits, no runs.
The asset managers running these funds — firms like Blackstone, Apollo, Ares, and Blue Owl — built real expertise in middle-market underwriting. They negotiated tighter loan protections than public bond markets typically allow, giving them earlier warning when borrowers started struggling. Loss rates stayed low. Institutions kept allocating.
By 2022, private credit had grown to roughly $1.5 trillion globally. Serious money managers were calling it one of the best risk-adjusted opportunities in a generation.
This is the version of the story that gets told in investor conferences and glossy pitch decks. It’s not wrong. It’s just incomplete.
The turn
Here’s what started to happen quietly, around 2021 and into 2022.
Institutional capital — the pension funds and sovereign wealth that built the asset class — started moderating its allocations. Not fleeing, but no longer growing at the same pace. The easy vintage years, when you could underwrite a deal at post-crisis prices with near-zero interest rates, were closing. Sophisticated allocators, who track private credit as a full-time job, began asking harder questions about valuations, about what the real default rate was, about what happens when rates stay high.
At roughly the same moment, the major asset managers made a strategic pivot.
They built retail distribution channels. Dedicated sales teams targeting wirehouses — the large full-service brokerage firms like Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo — along with registered investment advisors and independent broker-dealers. The people who sit across from teachers, small business owners, and retirees. They launched new product structures for this audience: Business Development Companies, or BDCs, packaged as “semi-liquid” funds offering quarterly redemptions.
Morgan Stanley described the idea plainly: the whole point was to “democratize” the market, giving average people access to the same products as pension funds and multi-billionaires.
From 2022 to late last year, these semi-liquid vehicles surged from $200 billion in assets under management to $500 billion. That is not organic demand. That is a distribution machine.
What “semi-liquid” actually means
When a financial advisor calls a product “semi-liquid,” they mean something very specific that most clients never fully register: you can request your money back quarterly, but total redemptions are capped at 5 percent of the fund’s net asset value per quarter.
At normal times, that cap sounds reasonable. Most investors aren’t trying to leave at once.
The problem is that liquidity is binary. Once investors understand that a gate exists, rational behavior changes. If I know that only 5 percent of the fund can exit each quarter and I think the fund might have problems, I’m not going to wait. I’m going to request redemptions now, just to secure my place in line. So does my neighbor. So does everyone who reads the same news article.
When that happens, the managers face a choice: which assets do they sell to fund the redemptions? They sell the best ones first — the most liquid, the most widely held, the easiest to move. The investors who stay are left with what’s left. Portfolio quality deteriorates, which makes more people want to leave, which triggers more sales.
This isn’t speculation. It’s already happening. In early 2026, Blue Owl halted redemptions from a retail credit fund after withdrawal requests exceeded the quarterly cap. Blackstone’s BCRED — Blackstone Credit, the firm’s flagship retail private credit fund with $82 billion in assets — saw investors request to pull a record 7.9 percent of assets in a single quarter, above the fund’s own self-imposed limit. Blackstone responded by injecting $400 million of its own capital to honor all redemptions. BlackRock’s HPS Corporate Lending Fund capped withdrawals at 5 percent after requests hit 9 percent.
Blackstone’s president, Jonathan Gray, told CNBC that the caps are “really a feature, not a bug.” Trading away liquidity for higher returns is, he said, the same tradeoff institutions have always made.
That argument has merit — for an investor who understood the tradeoff when they made it. The question this piece is really asking is: did they?
The decision chain
Private credit’s retail push didn’t happen by accident. It has a structure, and the structure has incentives built into every layer.
The asset managers — Blackstone, Apollo, Blue Owl, Ares built dedicated teams to place these products through financial advisors. Management fees on non-traded BDCs typically run 1.25 to 1.5 percent of gross assets annually, plus incentive fees up to 20 percent of profits. Because fees are calculated on gross assets — including borrowed money — the effective charge is higher than the headline percentage implies. If a fund borrows $1 for every $1 of investor capital and charges 1.5 percent on the combined pool, the investor is effectively paying 3 percent on their own money, not 1.5 percent.
The fee obscurement — In a Morningstar review of roughly two dozen unlisted BDCs, two-thirds left incentive fees out of their fee tables entirely — even though all of them charged those fees in practice. When you add incentive fees back in, the effective total cost can roughly double. The two funds singled out in that analysis: Blue Owl Credit Income and Blackstone Private Credit — the same two now facing the highest redemption pressure.
The financial advisors — Many genuinely believed in what they were selling. But non-traded BDCs carried sales loads and distribution fees that don’t exist in the mutual fund or exchange-traded fund (ETF) world. The asset managers embedded the compensation in the product cost, where it wouldn’t appear in a standalone advisor disclosure. In the same interview, Gray pointed at the advisors themselves: “It’s not a surprise that investors can get nervous, financial advisors can say ‘Hey, I want to redeem.’” The same channel that sold the product is now leading the exit.
None of this proves intent. What it describes is a system that worked extremely well for the people who designed it — until the moment it didn’t.
The other side of the chain
Back in Albion.
The Champion factory workers didn’t invest in a BDC. They probably don’t know what a BDC is. Their connection to this story runs through something more structural: First Brands — like most private equity-backed middle-market companies — was financed almost entirely on floating-rate debt. When interest rates rose, the interest burden rose with it. When rates stayed high — held up in part by tariff-driven inflation the Fed doesn’t know how to resolve — the cash flow math got worse every quarter. In the year before filing, First Brands’ payment delays to suppliers reached four times the industry average.
First Brands is an extreme case. Its founder and his brother were indicted in January 2026 on nine federal counts — bank fraud, wire fraud, money laundering — accused of fabricating receivables and concealing liabilities from lenders. The fraud is real and serious.
But the floating-rate trap is not fraud. It is a structural feature of how the middle market is financed — one that applies to thousands of companies that have never falsified a document. According to Fitch Ratings, the private credit default rate hit 9.2 percent in 2025, a new record. The industry simultaneously advertises loss rates near zero. Both numbers are, in their own way, accurate. The gap between them is where accounting gets creative: quiet equity handovers instead of public bankruptcies, arrangements that roll unpaid interest into the principal rather than recording a default, reclassification of distressed loans to avoid triggering concentration alarms.
9.2% — Private credit default rate in 2025, a new record according to Fitch Ratings. The industry’s advertised loss rate remains near zero. Both numbers are technically accurate.
The loss rate isn’t zero. The loss rate is being smoothed.
And the workers in Albion aren’t holding BDCs. But if retail redemption pressure causes fund managers to halt new lending in order to preserve cash — which is exactly what happens when a gate opens and the next borrower’s credit line review gets indefinitely postponed — the people who feel it first are the 48 million Americans working for companies that can’t easily access any other source of capital.
The BDC investor and the factory worker are not connected by intention. They’re connected by plumbing.
The working hypothesis: Private credit transferred real economic risk from sophisticated institutional investors to retail investors and middle-market employees at the same moment that risk was becoming harder to see — and harder to exit. The “democratization” of the asset class was, structurally, the end of the institutional vintage being made available to people with less information and less liquidity than the investors who came before them.
This thesis is wrong if retail BDC investors over the 2022–2026 vintage ultimately receive risk-adjusted returns equivalent to what institutions earned in the prior cycle. It is also wrong if the Fed cuts rates meaningfully before the 2026–2027 loan maturity wall — the cluster of private credit loans coming due for repayment within that window — arrives, relieving enough floating-rate pressure on middle-market borrowers to prevent a meaningful credit freeze. Both outcomes are possible. Neither is guaranteed.
What would change my mind
-
If retail investors were genuinely informed. If research on point-of-sale disclosures showed that investors in non-traded BDCs understood the gate mechanics before they invested — not as a footnote in a prospectus, but as a real explanation of what “semi-liquid” means under stress — the distribution critique loses most of its force.
-
If the default wave resolves quietly. Private credit has restructuring tools that public bond markets don’t. If the current wave of distressed arrangements bridges struggling borrowers to a rate environment where they can refinance, the Fitch 9.2 percent becomes a peak, not a floor.
-
If the middle market finds alternative capital. Traditional banks have been slowly re-entering some segments of middle-market lending. If that trend accelerates, a BDC credit freeze has less Main Street consequence than the employment numbers suggest.
The companion piece to this one covers the mechanics for investors who want to do the analysis themselves: volatility laundering, mark-to-model accounting, and what the actual loss rate math looks like when you count the quiet restructurings.
If you found this useful, the best thing you can do is forward it to one person who would push back on it. I’d rather be wrong in public than right in private.
A note on what I don’t know: I don’t have access to point-of-sale disclosure data, and the question of what specific investors were actually told by their advisors is not yet documented in public reporting. The structural argument — that the fee disclosure architecture obscures true cost — is well-sourced. The individual intent of any specific advisor is not something this piece can assess, and it doesn’t try to.