The rush for the exits in private credit is prompting fresh scrutiny of the sector’s less-liquid structures and its rapid expansion into the retail wealth space.
Blackstone has become the latest fund manager to be hit by a surge in requests from investors to withdraw from its flagship private credit strategy.
The asset manager said this week it will meet 100% of redemption requests in its gigantic $82 billion Blackstone Private Credit Fund, or BCRED, after investors sought to pull a record 7.9% of assets from the fund, or about $3.8 billion.
That came after Blue Owl Capital said last month it was ending regular quarterly liquidity payments in its Blue Owl Capital Corporation II fund, a semi-liquid private credit strategy aimed at U.S. retail investors. The private credit specialist will instead switch to periodic payouts funded by asset sales, earnings and other strategic deals.
This spike in redemption requests is now putting the private market industry’s courting of retail investors under closer scrutiny, and bringing the mismatch between non-publicly-traded, higher-yielding illiquid assets and retail-style access into sharper focus.
‘A feature, not a bug’
Blackstone — the world’s biggest alternative investment manager, with $1.27 trillion in assets under management — said it was upping a previously-announced tender offer to 7% of total shares, with the firm and employees offsetting the remaining 0.9%, in order to meet the redemption requests in full.
Blackstone Chief Operating Officer and President Jon Gray acknowledged that the risk of private credit firms failing to meet withdrawals, and potentially gating investors’ money, is “not beneficial in the near term” for the sector.
But speaking with CNBC’s “Squawk On The Street” Tuesday, Gray said individual investors and financial advisors “in most cases do” understand the product.
“What people sometimes fail to recognize is, they’re designed as semi-liquid products,” Gray said. “The idea that there are caps is really a feature, not a bug of these products. What you’re doing is trading away a bit of liquidity for higher returns. That’s the same trade-off institutional investors have made for a long period of time.”
Shares of publicly traded alternative asset managers — including Blackstone and Blue Owl, as well as KKR, Ares Management and Carlyle Group, among others — have dipped as concerns over multiple pressure points in the sector have spread.
These include late-cycle loan quality, AI-related risks in software portfolios, and fears of further individual blow-ups following the First Brands and Tricolor implosions last year.
Gray said that lowly-leveraged loans which produce a premium for investors are “a pretty good place to be,” adding that he expects they will continue to outperform liquid credit.
The BCRED fund has generated a 9.8% return since inception in its main share class, which indicates that, for now, the challenge remains one of liquidity rather than performance. Gray said there had been a “ton of noise” around private credit in recent weeks, adding, “it’s not a surprise that investors can get nervous.”
Moody’s Ratings warned that private credit’s tricky balance between delivering outsized returns while also offering retail-like liquidity will continue to be tested as the sector evolves towards the mainstream. In a recent commentary, Marc Pinto, global head of private credit at Moody’s, said funds may need to hold a larger proportion of more liquid, lower‑yielding assets to account for a growing retail presence — which could prove a drag on returns.
‘180-degree switch’
Ultimately, the underlying assets will remain illiquid, regardless of the fund’s structuring, said William Barrett, managing partner at Reach Capital. “The retail market has to be conscious of that and not invest in these products the same way it would in an ETF,” Barrett told CNBC via email.
“Private markets inflows have been dominated by the institutional market for decades,” Barrett told CNBC via email. “It makes sense for our industry to now offer our products to retail but we should probably test it first with HNWI [high net worth individuals] and mass-affluent segments rather than making a 180-degree switch to mass retail.”
Barrett said the industry has to carefully select the right target markets for the right liquidity structures and the right underlying assets.
He noted that while there has been little sign of underperformance in the credit space at the portfolio level, “it makes sense that semi-liquid products feel the liquidity pressure first.”
Man Group, the London-listed global alternatives manager which has expanded its private credit activity in recent years, said private credit loans are originated with the “express purpose” of being held to maturity.
“This lack of tradability is a feature of the asset class, not a flaw,” said Andrew Weymann, director, client portfolio manager, U.S. private credit, and Zeshan Ashfaque, senior managing director and senior credit officer, U.S. direct lending, in a note Tuesday.
They said redemption pressure in private credit could also be influenced by another area of weakness: exposure to software-as-a-service companies. Blue Owl is a significant direct lender to the sector, which has been shaken by concerns that rapidly advancing AI tools could erode traditional SaaS business models.
“If retail inflows slow and outflows pick up, particularly for managers most exposed to AI risks or whose capital bases have a significant retail component, this will be an additional headwind for the industry to contend with,” Weymann and Ashfaque noted.
