Trapped in Private Credit, Investors Wait to Pull Out $5 Billion

A wave of redemption requests in the private credit industry has left more than $4.6 billion in investor capital stranded behind withdrawal limits, and more asset managers are expected to impose restrictions in the coming weeks.

Investors have sought to withdraw about $13 billion from more than a dozen funds so far this quarter, according to Bloomberg estimates and data from Robert A Stanger & Co. But because vehicles can cap withdrawals at 5% of net assets per quarter, investors have only been able to access about two-thirds of the liquidity they sought, the data shows.

Apollo Global Management Inc. and Ares Management Corp. became the latest companies this week to limit buybacks, joining a list that includes the likes of BlackRock Inc. and Morgan Stanley. Still to come is industry heavyweight Blue Owl Capital Inc., which took several steps last quarter to avoid restricting withdrawals. How much investors seek to withdraw and whether the company again chooses to avoid imposing limits will be key in gauging pressure on the sector, according to market participants.

“The market expects redemption requests to continue to increase over the coming quarters,” said John Cocke, deputy director of credit investments at Corbin Capital Partners. “In favorable environments, there is plenty of liquidity and new subscriptions to satisfy redemptions. In times of perceived stress, inflows slow to a trickle and therefore many more customers demand liquidity than they provide.”

This, Cocke warns, risks creating a feedback loop in which limiting withdrawals makes it harder to attract new investors, thereby complicating efforts to manage exits.

Private lending companies have spent years courting retail investors, fueling a wave of new vehicles open to small customers. But hard-to-sell loans create a lag when trying to cash out, especially in one go.

Many products are therefore structured as “semi-liquid”, typically capping withdrawals at 5% or 7% of net asset value each quarter, while giving them the flexibility to exceed these limits or further restrict redemptions if necessary.

While some companies initially went to great lengths to accommodate all withdrawal requests, even those above the thresholds, most have in recent weeks begun to cap exits. Managers say these limits are necessary to be able to continue deploying capital, avoid selling high-quality assets and protect investors over the long term.

“There are 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 accepting too large redemptions, what does the surviving portfolio start to look like?”

Liquidity confusion

For people who wish to opt out, requests that exceed the limits are usually prorated, with only a portion paid and the remainder carried over to later periods. In some cases, investors received less than half of what they asked for. They must then resubmit applications in subsequent quarters, with no guarantee of being fully reimbursed if redemptions remain high.

Jim Zelter, president of Apollo, said Thursday that the industry may have failed to clearly explain liquidity restrictions to investors now looking to exit.

“Certain distribution channels in certain parts of the globe” may not have fully communicated the risks inherent in the asset class, Zelter said at the Asia Pacific Finance and Innovation Symposium in Melbourne. “So there is currently a lag in buybacks in the short term.”

The private credit funds tracked by Bloomberg that announced tender results this quarter collectively hold about $133 billion in net assets. Across all of these funds, withdrawal requests totaled nearly 10%, roughly double compared to three months earlier.

The amounts vary widely: from about 1.4% for the Golub Capital Private Credit Fund to about 14% for the Cliffwater Corporate Lending Fund, which has set its cap at 7%.

Ares said the majority of its redemption requests, which totaled 11.6% for the Ares Strategic Income Fund, came 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, emphasized the sustainability of its institutional capital.

Additionally, private credit funds are still seeing gross inflows, managers say, with those reviewed by Bloomberg having raised more than $5 billion so far this year, according to the latest available data. However, this is well below previous quarters.

“I expect redemptions to remain elevated,” said Larry Herman, chief executive of 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.

Oak, Blue Owl

So far, about three-quarters of non-traded private credit funds have announced the results of their tenders. Still to come are vehicles from Oaktree Capital Management and Antares Capital.

The most closely watched, however, will be those of Blue Owl, several of which are expected to close their tender slots by the end of the month.

The company, which targets retail investors more aggressively than some of its peers, has borne the brunt of market fears in recent weeks, amid concerns about private credit exposure to software companies vulnerable to AI disruption and lending standards generally.

Its Blue Owl Credit Income Corp. fund, one of the largest in the industry, saw redemptions of about 5.2% last quarter, while the smaller Blue Owl Technology Income Corp. fund. recorded withdrawal requests of over 15%, both of which were satisfied.

Spokespeople for Oaktree, Antares and Blue Owl declined to comment.

If redemption requests remain in double digits, private credit managers will face difficult choices to limit withdrawals, industry observers say.

“They say, ‘Well, look, over the last 20 quarters, you could have gotten away with it because as long as it’s below 5%, you’re fine,'” Boaz Weinstein, who is pursuing a tender offer to buy stakes in Blue Owl private credit funds at a deep discount, said on a recent Money Stuff podcast. “If it’s 10 percent, and that’s a lot, you can take away half of it, 5 out of 10. But what happens if it’s 40? What happens if you take away an eighth?”

“The reflexivity of falling NAVs, leading to greater capital outflows, leading to forced sales, leading to falling NAVs. And then you’ll be eliminated in three or four years.”

Offers

• Blackstone Inc. leads $1.3 billion financing supporting merger of pharmaceutical companies Paratek Pharmaceuticals Inc. and Radius Health Inc.
• Vingroup JSC’s hotel unit is seeking a private loan of up to $300 million for refinancing, the latest in a series of loans raised by the Vietnamese conglomerate.
• Private credit funds in talks to finance possible acquisition of events business CloserStill Media
• Direct loan funds in talks to fund potential acquisition of traffic and safety management provider Buko Traffic & Safety
• Blackstone’s flagship private credit fund plans to sell bonds backed by a large portion of its $82.5 billion in assets.
• Software company Planview Inc. has contacted private lending companies to help it deal with debt coming due next year.

Fundraising

• Goldman Sachs Asset Management has entered 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 financing.
• SMBC Group’s asset management arm and Aravest Private Funds have secured $165 million in commitments for a private credit strategy focused on real estate in Asia Pacific.

Job changes

• Sumitomo Mitsui Banking Corp. has hired former veteran JPMorgan Chase & Co. banker Reuben Ong, the Japanese lender’s latest hire as it expands into growth areas such as private credit and riskier structured debt.