Private credit funds are facing a liquidity crunch as investors pull more than $10 billion from products run by Blackstone, BlackRock, and others. The sector, which has grown to nearly $200 billion in retail-focused evergreen funds, is now showing cracks as worried investors exit amid concerns about overvalued loans and rising defaults. High-profile bankruptcies like First Brands have exposed poor lending standards.

Morgan Stanley, BlackRock, and Cliffwater have already limited withdrawals, while Goldman Sachs estimates up to $70 billion could flow out in the next two years. The problems are concentrated in semi-liquid funds marketed to wealthy individuals, which promised quarterly access but capped redemptions at 5 percent to prevent fire sales. Hedge funds like Saba Capital are circling, offering to buy out investors at steep discounts.

The industry's rapid growth - 60 percent annually between 2021 and last year - now looks precarious. While direct lending remains a crucial source of credit for startups and companies that can't access traditional bank loans, the retail-focused products may need stricter regulations before they expand further into retirement accounts. When investors get spooked, even the best legal protections won't prevent runs.