The scramble to exit private credit is leading to renewed examination of the sector’s less-liquid frameworks and its swift growth into the retail investment arena.
Blackstone has emerged as the latest fund manager facing a wave of requests from investors wanting to exit its premier private credit strategy.
The asset management firm announced this week it will accommodate 100% of redemption demands in its massive $82 billion Blackstone Private Credit Fund, or BCRED, following record withdrawal requests of 7.9% of assets, amounting to approximately $3.8 billion.
This followed Blue Owl Capital revealing last month that it was terminating regular quarterly liquidity distributions in its Blue Owl Capital Corporation II fund, a semi-liquid private credit initiative targeting U.S. retail investors. The private credit expert will instead transition to irregular payouts financed through asset sales, earnings, and other strategic arrangements.
This surge in redemption requests is currently putting the private market sector’s engagement with retail investors under increased examination, highlighting the disparity between non-publicly traded, higher-yielding illiquid assets and retail-style accessibility.
‘A feature, not a bug’
Blackstone — the largest alternative investment manager globally, with $1.27 trillion in assets under management — stated it is increasing a previously announced buyback offer to 7% of total shares, with the firm and its employees covering the remaining 0.9%, to fulfill the redemption requests completely.
Blackstone COO and President Jon Gray recognized that the risk of private credit firms being unable to fulfill withdrawals and potentially restricting investor access is “not advantageous in the short term” for the industry.
However, during an interview with CNBC’s “Squawk On The Street” on Tuesday, Gray mentioned that individual investors and financial advisors “in most instances do” understand the product.
“What people often overlook is, they are intended as semi-liquid products,” Gray stated. “The notion that there are caps is essentially a feature, not a flaw of these products. What you’re essentially doing is foregoing a degree of liquidity for enhanced returns. This is the same trade-off that institutional investors have engaged in for quite some time.”
Shares of publicly traded alternative asset managers — comprising Blackstone and Blue Owl, alongside KKR, Ares Management and Carlyle Group, among others — have declined as worries over various pressure points within the sector have proliferated.
These concerns encompass late-cycle loan quality, AI-related vulnerabilities in software portfolios, and apprehensions regarding additional individual failures following last year’s First Brands and Tricolor collapses.
Gray indicated that low-leverage loans yielding a premium for investors are “a pretty sound option,” asserting that he anticipates they will continue to surpass liquid credit in performance.
The BCRED fund has produced a 9.8% return since its inception in its primary share class, signaling that, for now, the challenge is more about liquidity than performance. Gray remarked there had been a “significant amount of discourse” surrounding private credit in recent weeks, adding, “it’s not uncommon for investors to feel anxious.”
Moody’s Ratings cautioned that the delicate balance for private credit in delivering substantial returns while also providing retail-like liquidity will continue to be challenged as the sector moves towards mainstream acceptance. In a recent commentary, Marc Pinto, global head of private credit at Moody’s, remarked that funds might need to maintain a greater share of more liquid, lower-yielding assets to adapt to the expanding retail presence — which could slow down returns.
‘180-degree pivot’
In the end, the foundational assets will remain illiquid, no matter how the fund is structured, said William Barrett, managing partner at Reach Capital. “The retail market needs to be aware of that and should not approach investing in these products in the same manner as it would with an ETF,” Barrett wrote to CNBC via email.
“For decades, private markets inflows have been primarily from the institutional sector,” Barrett noted. “It’s logical for our industry to now extend our offerings to retail but it may be wise to first pilot with HNWI [high net worth individuals] and mass-affluent demographics rather than executing an abrupt 180-degree change to mass retail.”
Barrett emphasized that the industry must prudently determine suitable target markets for appropriate liquidity structures and the right foundational assets.
He added that while there has been minimal indication of underperformance in the credit sphere at the portfolio level, “it is reasonable to assume that semi-liquid products will experience liquidity challenges first.”
Man Group, the London-listed global alternatives manager that has increased its private credit efforts in recent years, stated that private credit loans are issued with the “explicit aim” of being held to maturity.
“This lack of liquidity is a characteristic of the asset class, not a shortcoming,” 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 released Tuesday.
They noted that redemption pressures within private credit could also be affected by another area of fragility: exposure to software-as-a-service firms. Blue Owl has a substantial direct lending portfolio within this sector, which has been unsettled by fears that swiftly evolving AI tools could undermine traditional SaaS business models.
“If retail inflows decelerate and outflows increase, especially for managers most vulnerable to AI risks or whose capital bases comprise a significant retail segment, this will present an additional challenge for the sector,” Weymann and Ashfaque remarked.
