Investors were promised regular quarterly liquidity. Now, strict redemption caps leave capital trapped.
Private credit funds are reckoning with an uncomfortable truth: More investors want out than the funds are built to let leave.
Companies receive multi-year loans that can’t be sold quickly. That’s why lenders cap withdrawals at 5% a quarter. However, that safeguard is now being tested. Investors are asking to pull 10% to 16% of some funds in a single quarter, pushed out by worries about rising defaults, less deal activity and concerns over how managers value loans that never trade.
Each gated fund feeds the anxiety, and the line to get out isn’t getting much shorter.
The Tide of Redemptions
At Morgan Stanley, the pressure isn’t letting up. Investors in the bank’s North Haven Private Income Fund sought to redeem 11.4% of shares in the third quarter, little changed from 11.6% the prior quarter. And it’s not alone. Requests at Blackstone Inc.’s flagship Blackstone Private Credit Fund, known as BCRED, reached roughly 10%. At Cliffwater LLC’s flagship fund, they hit about 16%. Each fund capped repurchases at 5%.
These products were sold on periodic liquidity. They’re now hearing investors say: I want my money back.
“It works until it doesn’t, and it stops working precisely when investors most want out,” said Federico Basile, founder and managing partner of Capital-Hill Securities, a Luxembourg securitization issuer. “A quarterly cap on a portfolio of five-year private loans is not a liquidity feature. It is an acknowledgment that the asset has none.”
At Blue Owl Capital’s tech-focused fund, OTIC, requests have held nearly 39% of shares, nearly eight times the cap, amid concerns that AI could erode the software companies it lends to. Blue Owl has attributed the outflows to negative sentiment.
Blue Owl has called it “a headline-driven, not fundamental-driven, redemption environment,” according to co-CEO Marc Lipschultz on the firm’s April earnings call. His critics disagree.
The Mismatch in Retail Liquidity
| Fund | Q3 requests (% of shares) | Multiple of 5% cap |
|---|---|---|
| Cliffwater Corporate Lending Fund | ~16% | ~3.2x |
| Apollo Debt Solutions (ADS) | 14.7% | ~2.9x |
| HPS Corporate Lending Fund (HLEND) | 11.5% | ~2.3x |
| Morgan Stanley North Haven Private Income Fund | 11.4% | ~2.3x |
| Blackstone BCRED | ~10% | ~2x |
Lakshmi Ganapathi, founder of Unicus Research in Ridgefield, Connecticut, says everyday investors are walking into a mismatch they are poorly equipped to handle.
“Retail investors should not be anywhere close to anything that has to do with the private credit,” Ganapathi told Global Finance on a call. They are being sold quarterly exits, she said, on “an asset that does not trade.”
Big names and “trigger words” in sales material hold a lot of sway, she argued. So when Blackstone tells potential customers (as it did in March) that today’s market “looks nothing like 2008,” a retail investor may conclude the worries are so-called “fake news.”
She also pointed to risks she says no one can easily trace and likened the dynamic of new investors paying off earlier redemptions to Japan’s “extend and pretend” in the 1990s.
“You have this ‘Hyman Minsky’s Panzai Finance’ coming in— new money to pay off the old money.”
In some cases, she explained, loan books run through multiple nested shell companies and the system is “so intertwined worldwide that nobody knows where anything ends. That should scare people.”
‘Inconvenienced’ Capital
Wealth managers maintain that their clients have the patience to wait out the cycle—a point echoed by fund executives.
Tarek Omar, CEO and partner at Royce Stone Capital, a Melbourne-based private credit and investment firm, said a repurchase window does not change the underlying economics.
“Private credit by its nature is capital that is allowed to be inconvenienced, providing it is adequately rewarded for its patience,” Omar said. “A quarterly withdrawal process doesn’t change the nature of the loans. The money has been lent to someone.”
The 5% cap, he added, is communal. “That’s a shared cap, not an allowance each of us gets to use,” Omar said in an email. “Did I know that when I put the money in? That’s the question.”
Underlying uncertainty brings the focus back to a deeper vulnerability: how these illiquid corporate loans are valued in the first place.
If a fund marks its loans too high, investors who leave first collect more than their shares are worth, and those who stay cover the difference.
“If I thought a write-down was coming, why would I wait for it?” Omar asked.
Kimberly Flynn, president of XA Investments, a $1 billion fund platform and alternative investment consultancy segment of Chicago-based XMS Capital Partners, said many registered funds use independent third-party valuation firms, but rigor varies widely by firm.
She also flagged the growing use of payment-in-kind (PIK) income. That’s when borrowers pay interest with additional debt rather than cash. “The growing amount of PIK in direct lending is a source of concern for companies that are not current pay and has implications for valuation,” she said.
PIK income and non-accrual measures can help investors assess credit quality, but they are distinct from redemption pressure. Omar cautioned against treating the two as interchangeable. Some funds, as evidenced in BCRED’s letter, reported lower PIK-income share and non-accrual measures.
“The two things shouldn’t be bundled together as proof that the loans are getting worse,” he said.
Investors may nevertheless worry that valuations are too high or that portfolios could deteriorate. “If the investor believes that valuations are too high today, they may want to sell before valuations decline or portfolios become impaired,” Flynn said.
The Regulatory Blind Spot
Private credit executives often insist the industry is regulated enough, but Ganapathi disputes that. “Is regulation there? Yes, but is enforcement there? No,” she said. “Regulation is not equivalent to enforcement.”
She also questioned what retail buyers heard. “Are the retail investors being prepped about the risks that are involved in private credit?” she asked, adding that banks share a blind spot because they “have no clue how risky the money that they lend to private credit is.” Ganapathi also warned that pressure will likely build in 2027: “We expect the redemption wave to pick up speed.”
Meanwhile, Omar noted that a deterioration in collateral can reduce what a fund may borrow. “It hasn’t made the business loans disappear, and now there is less money available to meet withdrawals,” he said. For everyday investors, Omar added, the underlying test remains simple: “Someone buying an income investment still has to decide how long they can leave the capital there.”
Anthony Noto covers corporate finance and private credit. Contact him at [email protected]
Source: gfmag.com
