A wave of redemption requests across the private credit industry has left more than $4.6 billion of investor capital trapped behind withdrawal limits, with more asset managers expected to impose curbs in the coming weeks.
Investors have looked to pull roughly $13 billion from over a dozen funds so far this quarter, according to Bloomberg estimates and data from Robert A Stanger & Co. But since the vehicles can cap withdrawals at 5% of net assets per quarter, investors have only been able to access about two-thirds of the cash they’ve sought, the data show.
Apollo Global Management Inc. and Ares Management Corp. this week became the latest firms to limit redemptions, joining a list that includes the likes of BlackRock Inc. and Morgan Stanley. Still to come is industry heavyweight Blue Owl Capital Inc., which last quarter took several steps to avoid restricting withdrawals. How much investors seek to cash out, and whether the firm again opts to avoid imposing limits, will be a key to gauging pressure on the sector, market participants say.
“The market expects redemption requests to continue to increase in the coming quarters,” said John Cocke, deputy chief investment officer of credit at Corbin Capital Partners. “In benign environments, there’s lots of liquidity and new subscriptions to satisfy redemptions. In times of perceived stress, inflows slow to a trickle and thus significantly more clients are asking for liquidity than providing it.”
That, Cocke warns, risks creating a feedback loop in which limiting withdrawals makes it harder to lure new investors, in turn complicating efforts to manage outflows.
Private credit firms have spent years courting retail investors, fueling a surge of new vehicles open to smaller clients. But the funds’ hard-to-sell loans create a mismatch when they try to cash out, especially all at once.
Many of the products are therefore structured as “semi-liquid,” typically capping withdrawals at either 5% or 7% of net asset value each quarter, while giving them the flexibility to exceed those limits or further restrict redemptions as needed.
While some firms initially went to significant lengths to meet all withdrawal requests, even those above the thresholds, most have in recent weeks begun capping outflows. Managers say the limits are necessary so they can continue deploying capital, avoid selling off high-quality assets and protect long-term investors.
“You have the remaining investors and those trying to access liquidity, and managers have to balance the needs of both constituents,” said Michael Anderson, global head of credit strategy at Citigroup Inc. “If you start meeting redemptions that are too large, what does the surviving portfolio start to look like?”
Liquidity Confusion
For individuals who do want out, requests that exceed the limits are typically pro-rated, with only a portion paid out and the remainder pushed to future periods. In some cases, investors have received less than half of what they asked for. They must then resubmit requests in subsequent quarters, with no guarantee of being fully repaid if redemptions remain elevated.
Jim Zelter, president of Apollo, said Thursday that the industry may have failed to clearly explain liquidity restrictions to investors now seeking exits.
“Certain distribution channels in certain parts of the globe” may not have fully communicated the risks inherent to the asset class, Zelter said at the Asia Pacific Financial and Innovation Symposium in Melbourne. “And so you have a mismatch right now in shorter term redemptions.”
The private credit funds tracked by Bloomberg that have announced tender results this quarter collectively have about $133 billion in net assets. Across those funds, withdrawal requests have totaled almost 10%, roughly doubling from three months earlier.
The amounts have varied widely — from about 1.4% for the Golub Capital Private Credit Fund to roughly 14% for the Cliffwater Corporate Lending Fund, which set its cap at 7%.
Ares said a majority of its redemption requests, which totaled 11.6% for the Ares Strategic Income Fund, were from a limited number of family offices and smaller institutions, while Blackstone Inc., which did not limit withdrawals despite requests reaching 7.9% in its Blackstone Private Credit Fund, pointed to the staying power of its institutional capital.
What’s more, private credit funds are still seeing some inflows on a gross basis, managers say, with those reviewed by Bloomberg raising more than $5 billion so far this year, according to the latest data available. That’s well below previous quarters, however.
“I expect redemptions could remain elevated,” said Larry Herman, a managing director at Raymond James Financial Inc., adding “that said, investors continue to allocate new capital to these vehicles.”
Representatives for Apollo, Ares, BlackRock, Morgan Stanley, Golub, Cliffwater and Blackstone declined to comment.
Oaktree, Blue Owl
About three-quarters of non-traded private credit funds have announced their tender results so far. Still to come include vehicles from Oaktree Capital Management and Antares Capital.
The most closely watched, however, will be those from Blue Owl, a number of which are set to close their tender windows by the end of the month.
The firm, which has targeted retail investors more aggressively than some of its peers, has borne the brunt of market fears in recent weeks, amid concerns over private credit’s exposure to software companies vulnerable to AI disruption and lending standards broadly.
Its Blue Owl Credit Income Corp. fund, one of the industry’s largest, saw redemptions of around 5.2% last quarter, while the smaller Blue Owl Technology Income Corp. fund had withdrawal requests of more than 15%, both of which were met.
Spokespeople for Oaktree, Antares and Blue Owl declined to comment.
Should redemption requests stay in the double digits, private credit managers will face tough choices in limiting withdrawals, industry observers say.
“They say, ‘well, look, for the last 20 quarters you would’ve been able to get out of all of it because as long as it’s under 5%, you’re good,’” Boaz Weinstein, who is pursuing a tender offer to buy stakes in Blue Owl private credit funds at a steep discount, said on a recent Money Stuff podcast. “If it’s 10%, and that’s a lot, you can get out of half, 5 out of 10. But what happens if it’s 40? What happens if you’re getting out of an eighth of it?
“The reflexivity of falling NAVs, leading to larger outflows, leading to forced selling, leading to falling NAVs. And then you’re out in three or four years.”
Deals
- Blackstone Inc. is leading a $1.3 billion financing backing the merger of pharmaceutical companies Paratek Pharmaceuticals Inc. and Radius Health Inc.
- The hospitality unit of Vingroup JSC is seeking a private credit loan of as much as $300 million for refinancing, the latest in a series of borrowings raised by the Vietnamese conglomerate
- Private credit funds are in talks to finance a potential acquisition of events business CloserStill Media
- Direct-lending funds are in talks to finance a potential acquisition of traffic and safety management provider Buko Traffic & Safety
- Blackstone’s flagship private credit fund is planning to sell bonds backed by a broad swathe of its $82.5 billion of assets
- Software firm Planview Inc. has reached out to private credit firms to help it address debt maturing next year
Fundraising
- Goldman Sachs Asset Management has begun preliminary talks with investors to raise at least $10 billion for a global direct lending fund
- Oak Hill Advisors is launching a new fund that will deploy capital across public and private debt to target opportunities in areas such as direct lending and asset-backed finance
- SMBC Group’s asset management arm and Aravest Private Funds secured $165 million in commitments for an Asia Pacific real estate-focused private credit strategy
Job Moves
- Sumitomo Mitsui Banking Corp. has hired ex-JPMorgan Chase & Co. veteran banker Reuben Ong, the latest hiring by the Japanese lender as it expands into growth areas like private credit and riskier structured debt
Private assets in the hands of 401K holders, what could go wrong? Everything is liquid until it’s not.
Why is the financial press reporting on limiting the redemptions to the terms that every investor was informed of as if general partners are acting in bad faith? In some cases firms honored more than the 5% limit . Even if redemption requests were 10% of NAV, investors will receive 50% of their cash request now and can put on for a redemption next quarter.
There are statutory limits on how much qualified investors can allocate into these semi-liquid vehicles so they should not represent a sizable allocation for most long-term investors.
Additionally, the so called private credit “crisis” is fake news at its finest. If you read the reports from the major firms who originate these loans their non-accruals and PIK loans combined are insignificant. The media is creating a negative feedback loop that will result in even more redemption pressures I suspect.
A year from now or less when wise investors earn a 7% return it will be a non-story. 7% assumes some markdowns and potential increase in non-accruals. I think some of the reporters in the financial press truly don’t understand the space and how BDC’s work. You don’t think Blackstone, Ares, Apollo, Blue Owl and others were factoring in potential risks and opportunities in underwriting loans to software companies given AI adoption? So silly. Let the unsophisticated investors and advisors bail: will create a more stable asset class going forward for investors happy to earn high single digit to low double digits returns on a portion of their portfolio.