Israeli Institutions Have Nearly $17 Billion in Exposure to the U.S. Private Debt Turmoil
How exposed are Israeli institutional investors to the emerging crisis in debt funds? In recent months, the alternative funds industry has been dealing with cracks in the sector in the form of an unprecedented wave of redemptions in private debt funds, against the backdrop of concerns about rising default rates and the existential threat AI poses to the software companies that are major borrowers for large private credit players. The cracks have already become so deep that some have described the developing crisis as a potential black swan that could drag all of Wall Street into a credit crisis.
The crisis began in recent months when major players such as Apollo, Blackstone and Blue Owl announced a halt to redemption withdrawals after a wave of redemption requests from private clients. Accordingly, Blue Owl shares have fallen 37% since the start of the year, Blackstone has weakened 28%, and Apollo has declined 13%.
At Value, they explain that, "The debt market tends to react first to changes in sentiment. Unlike equity investments, debt relies on ongoing cash flow and not on future upside. Therefore, any change in risk perception is quickly translated into higher risk premiums and a response from investors. As a result, the private debt market, and especially funds with liquidity mechanisms, were the first to reflect the change in sentiment."
In recent years, like many other investment fields, the main fuel for private credit fund raising has come from institutional investors. In other words, pension fund and provident fund managers, who were looking for an alternative to investing in traded bonds, which provided low returns before 2022 because of the zero-interest-rate environment in financial markets.
In the private credit market, or direct lending, loans are extended directly to companies by non-bank entities such as investment funds, instead of through traditional banks or by raising bonds on the stock exchange. This industry has grown to enormous scale in the United States, mainly after the 2008 global financial crisis, when stricter U.S. regulation limited banks’ ability to lend to risky companies.
Israeli institutional investors are no different. According to the annual review by Value Advanced Investments, which surveys the alternative investment sector, the assets managed by Israeli institutions reached nearly $1 trillion at the end of 2025, about 3.1 trillion shekels. As a result, institutional investors are almost compelled to seek investment alternatives beyond the tradable market. This is how Israeli institutions also found themselves invested in the U.S. debt fund sector.
According to Value’s review, Israeli institutional investors have exposure of nearly $17 billion, which amounts to 1.7% of their total managed portfolio. The funds at the center of the storm, direct lending, account for an investment of nearly $1 billion, equal to 1% of the overall portfolio. Although these are high sums, when the size of the Israeli institutional portfolio is taken into account, it is still a relatively low share.
Among Israeli institutional investors, Migdal stands out for its exposure to the debt sector. It has $4.2 billion of exposure to private debt funds, 25% of Israelis’ exposure. In direct lending funds, Migdal has $3.5 billion of exposure, 35% of the total exposure of Israeli institutions in the field. Migdal manages assets worth 410 billion shekels, $132 billion, meaning its exposure to the sector amounts to 2.6% of its total investment portfolio.
Phoenix has $1.4 billion of exposure to direct lending funds and $2.2 billion in private debt funds. Phoenix manages assets worth $130 billion as of the end of 2025, so its exposure to direct lending amounts to 1.1% of total assets. Menora Mivtachim and Harel are exposed to direct lending in amounts of $1.3 billion and $1.2 billion, respectively, representing 1% of the total portfolios of both firms.
As noted, one of the main drivers of the private debt fund crisis is the rise of AI tools. Over the past decade, private credit funds have become the main lenders to the software sector, especially for companies acquired by private equity funds in leveraged deals. According to various estimates, about 40% of loans in the private credit market to companies backed by private equity funds are linked to the technology and software sector.
Software funds have become stable revenue generators through software subscriptions, SaaS. Therefore, such companies can be leveraged to a reasonable extent and take on credit and loans. Then came Anthropic’s Claude Code and similar tools from competitors, which are supposed to allow large organizations to develop software systems tailored to their employees at a low cost. Even if they are not built, they may be able to make do with significantly fewer subscriptions in the future as AI tools become more widespread.
Israeli institutional investors say that their investments in debt funds are intended only for institutional funds, so the crisis has not reached them so far. Private debt funds intended for institutions are usually private debt funds that are closed for predetermined periods of up to 10 years in advance, unlike private debt funds from which money can be withdrawn, so these funds do not suffer from redemptions. However, redemptions by private investors are only a symptom of the private debt funds, which, according to concern, may show a significant decline in returns, and therefore the flight of non-institutional investors is being recorded.
At Value, they believe the noise in the markets is largely exaggerated and does not reflect a deterioration in credit quality, except for loans focused on BDCs, business development company loans for small businesses. In their view, the current environment דווקא allows leading funds to exploit distortions and pricing gaps in parts of the private credit market.
