Following BlackRock and Blue Owl, the semi-liquid private credit funds of Morgan Stanley and Cliffwater have begun to leave investor redemption requests unfilled, after exceeding their safety thresholds. These are, respectively, the $7.6 billion North Haven Private Income Fund and Cliffwater’s flagship $33 billion fund—the latter, in particular, has received redemption requests amounting to 14% of its value, compared to a quarterly limit set at 7%.
While the industry continues to advocate for orderly management of the credit portfolio, with losses so far very limited, the fear spreading among investors is that exposure to the software sector could drive down valuations in the near future—which is a strong incentive to exit while there is still an opportunity to do so. Limits on redemption volume serve to prevent the sale of underlying credits on unfavorable terms, but also to limit the funds’ leverage—another option on the table when it comes to repaying investors.
In fact, managers argue that failing to limit redemption capacity could reduce the return on the entire portfolio—which in many cases is higher than in the standard bond market. Like a building without a panic bar, the simultaneous outflow of large amounts of capital from semi-liquid funds may allow the manager to “leave behind” some of those who wanted their investments back: a dynamic inherent in the concept of conditional liquidity that risks backfiring on the image of the entire sector.
Reimburse everyone or adhere to the established thresholds? Not all players have opted for the hard line: last week, in fact, Blackstone announced that it would reimburse all applicants for one of its private credit funds that had come under stress. A move that reassures investors, even if it could send the wrong message in the long term: fueling the idea that the liquidity of these funds is more readily available than it actually is.
The real issue is the quality of the underlying loans
Another factor causing concern among industry insiders is the actual value of the underlying loans. The Blue Owl fund—which sparked industry-wide fears and permanently closed off the possibility of early redemption—has so far sold off loans at just under face value, a factor that, on paper, should reassure exposed investors. In practice, however, some doubt that all underlying assets are of the same quality.
First and foremost, it is shareholders who do not believe that business is going well for the giants of the private markets. Over the past six months, Blue Owl’s stock has lost more than half its value on the stock market, while KKR, Blackstone, and Ares have all fallen by over 40%. These are significant losses, particularly because in the private markets—unlike in asset management—the interests of fund managers are directly aligned with those of investors: if the portfolio underperforms, the loss or underperformance also affects the fund managers.
For private credit, the major problem does not appear to be the risk of recession, but rather the impact of artificial intelligence on a long list of technology companies that have been the sector’s most frequent investment. According to Partners Group Chairman Steffen Meister, “there is a good chance that the default rate in private credit will double in the coming years,” compared to the 2.6% average recorded over the past decade.
“Credit has this problem: if a company is doing very well, your upside potential is limited—you only collect interest,” he told the Financial Times, “but you’re fully exposed to the downside—and that’s where the problem arises.”
Investors are rushing for the exit as uncertainty grows
Semi-liquid funds do not currently factor such pessimistic scenarios into their valuations: those who request and receive redemption walk away “clean” and eliminate any doubt about future losses. The problem is that this awareness is spreading, and investors—to return to the image of the panic bar—are already crowding the exit door.
Paradoxically, the war in Iran would have been met with relief by some of the private credit clients managed by Goldman Sachs, said Kunal Shah, co-CEO of Goldman Sachs International and global co-head of fixed income, currencies, and commodities, during a call: some of the bank’s “private markets clients” are “simply glad there is something to talk about other than exposures to software and private credit. And this [the conflict in Iran] is at least a distraction from that issue.”
