Private credit investors pulled more than $7 billion from some of Wall Street’s biggest funds in the final months of last year as panic 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 faced a surge in redemption requests, according to the Securities and Exchange Commission and people familiar with the matter.
According to FT calculations, redemptions were running at about 5 percent of the value of the fund’s investment portfolio, excluding loans. Officials say the $7 billion figure will rise as funds report higher numbers in the coming weeks, underscoring how investor appetite for private debt has waned in the wake of two high-profile corporate failures.
“Redemptions are increasing across the board,” a senior private credit executive told the FT.
The asset class has been tarnished by the failures of First Brands and Tricolor, despite these companies largely financing themselves through loans and asset-backed securities provided or held by banks.
Comments by JPMorgan Chase Chief Executive Jamie Dimon, who warned after the Tricolor failure last year that “when you see one cockroach, there are probably more”, have added to investor unease.
“I think there is a lot of fear in the air and time will tell whether those fears are justified,” said Philippe Hasbrouck, co-head of Cliffwater’s asset management business.
Senior people in the sector also pointed to the decision by private investment firm Blue Owl to cancel the merger of two of its funds, which could have resulted in losses for investors in one of the vehicles, as increasing investor resentment.
“In October, stories around First Brands and Tricolor in particular were making headlines,” said another private credit executive.
Investor interest in the asset class began to wane last year as the Federal Reserve signaled that it would begin lowering interest rates, reducing the returns on offer in the credit markets. This prompted several major private credit funds – which invest in floating rate debt – to cut their dividends.
“Given this broader theme around low rates, there has been a marked decline in demand for floating rate credit strategies,” the executive said.
Investor withdrawals have hit so-called non-traded business development companies (BDCs) and gap funds, which have become the primary way for retail and high net worth individuals to invest in the $2.3tn private credit industry.
The funds have so far agreed to meet redemption requests, including when they exceed quarterly limits that would otherwise allow the manager to limit withdrawals, typically to 5 percent a quarter.
Blackstone’s flagship $79 billion private credit fund, the largest in the industry, had redemption requests of $2.1 billion in the fourth quarter, or about 4.5 percent of the fund. It was more than 1.8 percent in the third quarter. Ares’s $23 billion Strategic Income Fund has reported withdrawals of just under $600 million, or 5.6 percent of the fund’s net asset value.
The $25bn BlackRock fund, known as the HPS Corporate Lending Fund, said redemptions rose from 1.6 per cent to 4.1 per cent, or about $475mn, in the most recent quarter.
Investors have sought to cash out 5 percent of their shares in the $34bn Blue Owl fund, known by the ticker OCIC, according to a person with knowledge of the matter. By contrast, payouts from the company’s technology-focused investment fund rose from 2.6 percent to nearly 15 percent, a top executive said last week. Seeing the rise, the firm had removed the cap on redemption to 19.3 per cent, allowing investors to exit.
Despite this, funds have continued to take in more new money than they paid out so far, according to Barclays analysts, including Apollo, Ares, Blackstone, BlackRock, Barings and Oaktree.
This has limited the need to tap available liquidity or sell assets to raise capital to meet redemptions. All funds have access to bank credit lines for withdrawals and some have a portfolio of liquid loans that they can sell if needed.
Peter Troisi, an analyst at Barclays, said new investment in BDCs has also slowed since August, with flows in December down 26 percent from the previous month, based on the handful of funds that have already reported.
Executives say they hope the willingness of funds to meet redemption requests will boost confidence in the private credit industry and help differentiate the asset class from real estate, which was hit hard by the Fed’s rate hike in 2022. Many funds imposed redemption restrictions due to the decline in the value of their real estate holdings, including Blackstone’s giant fund known as Breit.
Investors are watching for signs of trouble, including a rise in defaults on private debt loans. But so far analysts say credit quality remains stable.
Blue Owl said the performance of its technology fund remains “strong” and the portfolio is “well positioned and with leverage below target, we maintain adequate liquidity for investments and obligations”.
Ares in December told customers in its fund that its investments remain “healthy” and that it remains committed to maintaining its dividend until June. Blackstone said that “investors continue to recognize the premium that private debt can offer compared to public fixed income”.
Cliffwater’s Hasbrouck said the company is “not concerned about our ability to perform, knowing that we have a lot of liquidity and we think things will improve quarter over quarter.”
BlackRock and Oaktree declined to comment.
eric.platt@ft.com
