Alasdair Glass discusses the private credit sector’s liquidity crunch and the disputes that may follow, in the Law Society Gazette

A cautionary tale

In February 2026, Market Financial Solutions (MFS) collapsed. MFS was a UK specialist mortgage lender that had built a loan book worth £2.4 billion, financed through warehouse facilities extended by some of the world’s largest banks. Within weeks of the firm’s failure, amid allegations of fraud and claims of an 80 per cent shortfall in verifiable collateral, the losses cascaded outward. Barclays took a £228 million hit. HSBC recorded a $400 million impairment, routed through Apollo-backed Atlas SP. Santander disclosed $267 million in exposure. The FCA has since opened a formal investigation.

MFS is not an isolated episode. It is an early symptom of a broader reckoning across the private credit sector, a market that has ballooned to over $2 trillion in global assets under management and is now being tested, on multiple fronts, for the first time in its modern history.

What is going wrong?

Two forces are squeezing the sector simultaneously. On one side, redemption requests from investors have increased sharply. On the other, the banks that provide the leverage on which many private credit strategies depend are stepping away or restricting lending.

The redemption wave has been striking. In the first half of 2026, Apollo, BlackRock, Blue Owl and others either imposed or tightened withdrawal gates on their credit vehicles. At Apollo’s $15 billion retail credit fund, redemption requests rose to 17 per cent of fund value leading the manager to cap payouts at 5 per cent. Partners Group restricted withdrawals from its $8.6 billion Global Value SICAV (an evergreen private equity fund) after requests hit approximately 9.8 per cent of net asset value, nearly double its quarterly ceiling, and warned that a $15.8 billion US-domiciled vehicle could face the same treatment.

Behind these numbers lies a cocktail of investor anxiety: concerns about fraud in underlying portfolios, loan losses, exposure to AI-driven disruption in the software sector, and downward revaluations of loan books by both funds and their bank lenders.

At the same time, the banking sector has been pulling up the drawbridge. HSBC told clients it would no longer finance riskier private credit funds. Barclays’ chief executive spoke publicly of “constraining lending to certain structured finance counterparties who operate more vulnerable business models.” Banks supply hundreds of billions of dollars in back-leverage every year. When they withdraw, the consequences ripple downstream: funds face liquidity pressure, which may compel asset sales at distressed prices, which in turn trigger further markdowns at the bank level. The Chair of the ECB Supervisory Board has warned that this web of interconnection “create[s] channels through which shocks can be transmitted, amplified and redistributed across the financial system.”

Where will the disputes land?

As stress in the sector increases, disputes can arise in a number of different contexts.

Fights over gates and redemptions. Gating mechanisms within credit funds, which cap quarterly redemptions by investors at a certain level, are designed to prevent fire sales and protect the broader investor base. But where fund documentation grants managers discretion over how and when to impose gates, the exercise of that discretion becomes fertile territory for challenge. The stakes rise sharply where fund managers or their affiliates have redeemed their own positions whilst other investors remain locked in, a scenario that invites claims of breach of duty and conflict of interest. Equally contentious are cases where certain institutional investors appear to have secured preferential treatment through side letters or other arrangements. There is also a subtler problem: the mechanics of pro rata redemption can incentivise more sophisticated investors to overstate their withdrawal requests, gaming the allocation of limited liquidity at the expense of those who submit genuine requests at face value.

Challenges to asset valuations. Much of what is held in private credit portfolios cannot be priced by reference to a liquid market. Valuations rest on models, assumptions and the judgement of the fund manager making them inherently contestable. In April 2026, Grizzly Research published a report alleging that up to 40 per cent of the assets in Partners Group’s evergreen fund were materially overmarked leading Partners Group to threaten proceedings against Grizzly. Claims may be framed around breach of valuation methodology obligations in fund documentation, breach of the duty of care owed to investors, and misrepresentation through materially misleading published NAVs. Third-party valuers and auditors might also find themselves as targets.

Mis-selling and disclosure failures. The marketing of private credit products to a wide pool of investor-classes including retail and wealth clients, has increased the scope for potential mis-selling and misrepresentation claims. Investors may argue they were never adequately told that the fund’s model depended on bank-provided leverage that could be withdrawn, that portfolio concentration risks were understated, or that gating and suspension provisions were not properly explained. The potential causes of action are broad: breach of contract, misrepresentation, negligence, breach of fiduciary duty, and breaches of obligations under the FCA Handbook. The availability of litigation funding may also enable group actions by retail investors with individually modest but collectively significant losses.

Disputes between funds and their lenders. As withdrawal or restriction of back-leverage becomes more frequent, issues may arise over whether lenders were contractually entitled to refuse facility renewals, whether margin calls or collateral write-downs were commercially reasonable, and whether portfolio concentration covenants or NAV triggers were breached. Facility agreements routinely include provisions to protect the banks including material adverse change clauses, events of default, and broad discretionary powers to demand additional collateral. Where banks exercise those powers, the Braganza duty (established in Braganza v BP Shipping) will require them to show that the discretion was exercised in good faith and for proper purposes, a standard likely to be tested rigorously in any proceedings that follow.

What practitioners should be doing now

Solicitors advising participants in the private credit chain should be alive to the following priorities.

For those acting for fund managers: the immediate task is a review of fund documentation and compliance with obligations. Are gating provisions, discretionary powers and valuation methodologies clearly set out and being applied consistently? Is the governance framework around valuations (including valuation committee independence and documentation of valuation decisions) robust enough to withstand scrutiny?

For those acting for banks: facility documentation should be reviewed to confirm that the bank’s rights, such as rights to mark collateral, to call margin and to decline renewal, are unambiguously defined. Critically, every exercise of those rights needs to be documented contemporaneously and supported by a clear rationale.

For those acting for investors: the priority is awareness of potential causes of action and preserving the evidential position. What representations were made at the point of investment? What was said, or not said, about liquidity, gating, leverage and concentration risk?

Private credit grew rapidly in a benign environment. As conditions become more difficult, the disputes that may follow will test the contractual architecture, the disclosure standards and the governance frameworks that underpin the sector. For the legal profession, this is both a challenge and an opportunity.