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Wealthy investors attempted to pull more than $20bn from private credit funds in the first quarter, underscoring the growing strain on an asset class that had boomed into a dominant force on Wall Street.
The $20.8bn in redemption requests hit huge groups in the sector, including Apollo Global Management, Ares Management, Blackstone, Blue Owl and KKR, according to FT calculations.
The funds tracked by the FT, which collectively manage investment portfolios worth about $300bn, have honoured just over half of the redemption requests they received. Many investors have been forced to wait until a redemption window opens up later this quarter to exit.
The withdrawals reflect intensifying concerns over the private credit industry’s lending to private equity-backed software companies and the uncertainty those businesses face as AI rapidly advances.
It also comes as investors fret over ageing leveraged buyouts that PE firms have struggled to exit, deals that have largely been financed by private credit.
Greg Obenshain, director of credit at Verdad Advisers, said that investor flight was often the “first chapter in most credit cycles”.
“Flows are the forward indicator of distress both because they reflect future expectations of trouble and because they help reveal the distress,” he added.
The private credit industry has grown briskly since the 2008 financial crisis, when regulators curbed how much risk big banks can take. Asset managers stepped into the void, providing ever larger cheques to the buyout industry and drew in investment from pension funds and endowments enticed by juicy returns marketed on funds.
More recently, private credit managers have also targeted affluent individual investors who they had viewed as a key growth market. Unlike their institutional counterparts who make decisions over long time horizons, retail investors tend to be more fickle and have bristled at the redemption limits on most private credit vehicles.
Executives across the industry have taken different strategies as redemption requests have swelled. Some, including Blackstone and Oaktree, have honoured withdrawals even when they have surpassed a 5 per cent threshold that would allow them to restrict outflows.
Others, like BlackRock’s HPS Investment Partners, Apollo, Ares, Blue Owl and Morgan Stanley, have limited redemptions, arguing that the caps protect investors choosing to remain in the funds and prevent any fire sale of assets.
Managers have also noted that they are not seeing a deterioration in the loans they have underwritten, with Blue Owl co-president Craig Packer telling investors in one of the firm’s funds that there was a “meaningful disconnect between the public dialogue on private credit and the underlying trends in our portfolio”.
Both Blackstone and Apollo, meanwhile, have launched their own public relations campaigns to help counter the negative narrative around the downturn private credit is facing.
But some analysts on Wall Street believe that private credit will come under more acute pressure if there is a broader market downturn.
Morgan Stanley expects the industry’s default rate to rise to 8 per cent over the next year from 5 per cent currently, given its high exposure to software companies.
Daniel Fannon, an analyst at Jefferies, added, “though managers have consistently asserted that their portfolios do not have underlying credit issues, this has not dissuaded retail investors from lining up to get their money back”.
Despite the race to the exits, the caps managers have put on withdrawals has meant that many funds have continued to grow in size.
Investment bank RA Stanger estimates the industry raised $3.5bn in non-traded business development companies, popular private credit investment vehicles, in January and February, with billions of dollars more flowing into interval funds.
Still, the recent exodus from the industry has drawn the scrutiny of the Federal Reserve and Treasury Department.
Earlier this week, JPMorgan Chase chief executive Jamie Dimon warned that losses for lenders to highly indebted companies will be higher than many expect as a result of weakening lending standards.
Analysts at credit rating agency Moody’s this week also downgraded their outlook for the private credit industry, citing the “increased redemption pressures” funds were facing.
Data visualisation by Eva Xiao