Dispersion in asset performance “is set to accelerate”, according to Oaktree Capital’s co-chief executives, who cited the combination of concerns about private credit’s exposure to the software sector, “resurgent” inflation and “stubbornly high” interest rates.

In the latest Oaktree credit quarterly covering the first quarter of 2026, Robert O’Leary, co-chief executive and portfolio manager, and Armen Panossian, co-chief executive and head of performing credit, said that three months after identifying dispersion as a “central theme”, it has “only become more pronounced”.

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“CCCs [rated loans] aren’t looking any healthier but a volley of headlines regarding potential vulnerabilities in the credit markets – chiefly relating to software debt – has impacted investor sentiment,” they wrote. “Add in resurgent inflation and stubbornly high interest rates, which compound the pressure on already-struggling borrowers, and we feel dispersion in asset performance is set to accelerate.”

O’Leary and Panossian acknowledged that, while the “bulk” of the credit universe “remains in decent health”, a subset of borrowers are under increasing pressure.

“In performing credit strategies, managers must avoid the losers to retain a still-attractive contractual yield. In more opportunistic strategies, there’s a growing potential to selectively pursue pockets of dislocation,” they stated.

So far in 2026, CCC-rated loans have seen spreads widening by more than 300 basis points. In contrast, BB-rated loan spreads have “marginally” tightened this year, making for a yield of just over six per cent, which they wrote is “the sort of aggressive bifurcation normally seen in a recession”.

“Market participants are expressing a clear view: the weakest credits cannot handle elevated interest rates and will struggle to refinance through mainstream channels,” O’Leary and Panossian said. “Given the risk of default and the reality of poor recovery rates, buyers expect to be compensated in the form of an outsized spread. Meanwhile, higher-quality names continue to attract a broad buyer base, particularly from collateralised loan obligations, thereby keeping spreads tight.”

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In the quarterly note, Oaktree’s co-chief executives also discussed the “growing pains” in direct lending, including payment-in-kind (PIK) reliance, which represents around 10 per cent of total interest for public business development companies (BDCs), and around four per cent for perpetual BDCs, albeit with “dramatic variation” among managers.

“PIK loans are currently marked at 91 cents on the dollar, indicating all isn’t well for this subset of loans,” they added.

O’Leary and Panossian pointed to the “liquidity mismatch” in evergreen funds as another growing pain, with a surge in redemption requests above the standard five per cent threshold prompting some BDCs to limit redemptions this year, including those managed by Blue Owl Capital, and Blackstone.

Finally, they noted the growing concerns among investors about the level of exposure to the software sector as AI threatens to upend its business model.

For O’Leary and Panossian, all three direct lending “growing pains” are “a good reminder of the importance of increased selectivity in direct lending”, while “pockets of weakness may create potential access points for opportunistic investors”.

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