Private credit’s very bad month started on March 2, when Blackstone Inc.’s BCRED revealed what was at the time its largest investor redemptions ever. It was bookended on April 2, when Blue Owl Capital Inc. said two of its funds faced massive withdrawal requests of 22% and 41%, forcing the firm to largely block the exits.
Then, for a while, it was relatively quiet. Shares modestly rebounded. There was talk of cleaning up portfolios; the industry concerns being overblown; getting knocked down but becoming stronger for it.
But as the calendar turned to June 2, the drumbeat of dread got louder once again, with Cliffwater LLC’s flagship $31 billion private credit fund disclosing that investors looked to yank 17% in the second quarter, even more than the 14% in the prior period. Investors and analysts alert for bad news didn’t have to wait long: Swiss firm Partners Group Holding AG capped withdrawals at one of its evergreen private equity funds, and said it’s ready to gate other funds including in the US.
And then came Blackstone again. On Thursday, the asset management giant limited redemptions from BCRED, the biggest private credit fund of its kind, at 5%. Investors had sought to pull 10% — a new record.
The $1.8 trillion private credit industry is finding out that trying to shake investor angst about the market is more of a marathon than a sprint. Such is the nature of long-term lending — there are few quick answers to the concerns that the market became too concentrated on software assets, a sector that’s ripe for disruption by artificial intelligence. The lack of certainty is fueling widely divergent opinions.
“The disease is spreading,” said Pierre-Yves Gauthier, chief executive officer at AlphaValue. Meanwhile Brett Klein, global head of corporate credit at Sculptor Capital, made the case at the Bloomberg Global Credit Forum this week that investors are simply “recognizing that the double-digit returns in private credit are several hundred basis points lower.”
Cliffwater, the father-son firm that has become one of the industry’s success stories over the past decade, was among the first private credit funds to report redemptions for this quarter. Bigger rivals including funds run by Apollo Global Management Inc. and Ares Management Corp. are due to report in the coming weeks.
No one should be surprised by private credit’s next round of redemption requests, according to Scott Goodwin, managing partner of Diameter Capital. He summed it up as a prisoner’s dilemma for retail investors: “If I don’t redeem and everyone else redeems then I get left with the bad stuff,” he said at the Bloomberg event.
Cliffwater CEO Stephen Nesbitt said in its letter to investors that the fund’s repurchase program was “intentionally designed to provide shareholders with periodic liquidity that aligns with the fund’s long-term investment strategy and its underlying assets.”
At the same time, the non-traded business development companies facing a wave of redemptions from retail investors represent a small subsection of the market. They are dwarfed by closed-end vehicles marketed to institutional investors, which lack any mechanism for investors to redeem capital.
Among these, some managers are still finding plenty of appetite. French asset manager Eurazeo SE raised €3.9 billion ($4.5 billion) for its latest flagship direct lending fund. Bridgepoint Group Plc is also poised to raise about €5 billion for its newest European direct-lending vehicle. On Wednesday, Crescent Capital Group closed its largest fund ever, lining up more than $5.5 billion for a direct-lending strategy.
“These underlying funds are meeting what we guided investors to expect, that’s high single-digit or double digit returns,” Blair Jacobson, co-president of Ares, said on Bloomberg TV Thursday. “As long as that continues we think there’s going to be a very bright future for wealth products.”
Still, private credit hasn’t been tested through a serious default cycle before. Many restructurings and default events are still not captured in public reporting, leading some major investors to suggest returns are overstated and losses understated.
“There’s a lot going on beneath the surface,” Pacific Investment Management Co.’s chief investment officer Daniel Ivascyn said in an emailed circular. The first sustained default cycle in credit in many years is already starting, Ivascyn said.
His warning echoed those of a range of market leaders warning that a long-delayed reckoning may finally be approaching. The official private credit default rate reached 6% as of the end of April, a record high since the inception of Fitch Ratings’ gauge, according to the firm.
“It’s been so long since we had a real credit cycle because Covid lasted three months,” JPMorgan Chase & Co. CEO Jamie Dimon said last week. “We’re going to have a credit cycle one day. And I don’t know when that’s going to happen. I think when it happens, it will be worse than people expect.”
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