Private credit investors pulled more than $7bn from some of the biggest funds on Wall Street in the final months of last year, as jitters over credit quality following the bankruptcies of First Brands and Tricolor hit one of the fastest-growing parts of finance.
Funds managed by Apollo Global Management, Ares Management, Barings, Blackstone, BlackRock’s HPS Investment Partners, Blue Owl, Cliffwater and Oaktree all suffered an uptick in redemption requests, according to filings with the Securities and Exchange Commission and people familiar with the matter.
Redemptions were running at about 5 per cent of the value of the funds’ investment portfolios, net of debt, according to FT calculations. Executives say the $7bn figure will grow as funds report more numbers in the weeks ahead, underscoring how investor appetite for private credit has deteriorated in the wake of the two high-profile corporate failures.
“Redemptions are up across the board,” one senior private credit executive told the FT.
The asset class has been tarnished by the failures of First Brands and Tricolor, despite those companies largely financing themselves through loans and asset-backed securities provided or organised by banks.
Comments from JPMorgan Chase chief executive Jamie Dimon, who last year warned that “when you see one cockroach, there are probably more” after Tricolor’s failure, have added to the investor unease.
“I think there is a lot of fear in the air and time will tell if those fears are well founded,” said Philip Hasbrouck, the co-head of Cliffwater’s asset management business.
Senior figures in the sector also pointed to the decision by private investment firm Blue Owl to call off a merger of two of its funds, which would have inflicted losses on investors in one of the vehicles, as adding to investor angst.
“The stories in October in particular around First Brands and Tricolor were headline grabbing,” another private credit executive said.
Investor interest in the asset class had already started to wane last year as the Federal Reserve signalled it would begin to lower interest rates, reducing the returns on offer across credit markets. That prompted several major private credit funds — which invest in floating rate debt — to cut their dividends.
“There is clearly a reduced amount of demand for floating rate credit strategies given this broader theme around lower rates,” the executive added.
Investor withdrawals have hit so-called non-traded business development companies (BDCs) and interval funds, which have become the primary way that retail and high-net worth individuals invest in the $2.3tn private credit industry.
Funds have thus far agreed to meet redemption requests, including when they have exceeded quarterly thresholds that would otherwise allow a manager to limit withdrawals, typically to 5 per cent in a quarter.
Blackstone’s flagship $79bn private credit fund, the largest in the industry, had $2.1bn of redemption requests in the fourth quarter, or about 4.5 per cent of the fund. That was up from 1.8 per cent in the third quarter. Ares’ $23bn strategic income fund reported just under $600mn of withdrawals, or 5.6 per cent of the fund’s net asset value.
The $25bn BlackRock fund, known as the HPS Corporate Lending Fund, said that redemptions rose to 4.1 per cent from 1.6 per cent, or roughly $475mn in the most recent quarter.
Investors have sought to redeem 5 per cent of their shares from a $34bn Blue Owl fund known by the ticker OCIC, according to a person briefed on the matter. Redemptions from the firm’s technology-focused investment fund, in contrast, surged to roughly 15 per cent from 2.6 per cent, a top executive said last week. Seeing the rise, the firm had lifted the cap on redemptions to 19.3 per cent, allowing investors to exit.
Despite this, funds have so far continued to take in more new money than they have had to pay out, according to analysts at Barclays, including for Apollo, Ares, Blackstone, BlackRock, Barings and Oaktree.
That has limited the need to tap available liquidity or sell assets to raise capital to meet redemptions. The funds all have access to bank borrowing lines to fund withdrawals and some hold a portfolio of liquid loans that they could sell if needed.
Peter Troisi, an analyst at Barclays, said that new investments into BDCs had also slowed since August, with inflows in December down 26 per cent from the month prior, based on the handful of funds that have already reported.
Executives say they hope that the willingness of funds to meet redemption requests will bolster confidence in the private credit industry and help differentiate the asset class from real estate, which in 2022 was hard hit by the Fed’s rate hikes. Several funds imposed redemption restrictions as the value of their real estate holdings slid, including Blackstone’s mammoth fund known as Breit.
Investors are watching for signs of distress, including an uptick in defaults on private credit loans. But so far, analysts said that credit quality remained stable.
Blue Owl said performance for its technology fund had remained “strong” and that the portfolio was “well positioned and with leverage below target, we maintain substantial liquidity for investments and obligations”.
Ares in December told clients in its fund that its investments remained “healthy” and that it would commit to maintaining its dividend through June. Blackstone said that “investors continue to recognise the premium private credit can offer versus public fixed income”.
Cliffwater’s Hasbrouck said the firm was “not worried about our ability to perform, knowing that we have a lot of liquidity behind us and we think quarter on quarter things will get better.”
BlackRock and Oaktree declined to comment.