Investors Pull Over $7 Billion From Top Private Credit Funds Amid Default Fears

Private credit investors pulled more than $7 billion from some of Wall Street’s largest funds in the final months of last year, as concerns over credit quality rattled one of finance’s fastest-growing sectors following the defaults of First Brands and Tricolor.

Funds managed by industry giants including Apollo Global Management, Ares Management, Barings, Blackstone, BlackRock’s HPS Investment Partners, Blue Owl, Cliffwater, and Oaktree all experienced a spike in redemption requests, according to regulatory filings and people familiar with the matter.

The redemptions amounted to roughly 5% of the funds’ investment portfolios after deducting debt, according to FT calculations. Executives say the $7 billion figure will climb as more funds report data in the coming weeks, underscoring how investor appetite for private loans has soured.

“Redemptions have been up 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, even though those companies were largely financed through asset-backed loans and securities provided or arranged by banks.

Comments from JPMorgan Chase CEO Jamie Dimon, who warned last year after the Tricolor collapse that “when you see a cockroach, there are probably others,” have amplified investor anxiety. “I think there’s a lot of fear in the air and time will tell if those fears are well-founded,” said Philip Hasbrouck, co-head of Cliffwater Asset Management.

Senior industry executives also pointed to private equity firm Blue Owl’s decision to scrap a merger of two of its funds, which would have inflicted losses on investors in one of them, as another factor contributing to unease.

“The October news, particularly around First Brands and Tricolor, grabbed headlines,” said another private credit manager. Investor interest in the asset class was already waning last year after the U.S. Federal Reserve signaled it would start cutting interest rates, diminishing the returns offered in credit markets.

This prompted many large private credit funds—which invest in floating-rate debt—to reduce their dividends. “There is clearly reduced demand for floating-rate credit strategies given the broader lower rate backdrop,” the manager added.

The investor withdrawals have hit so-called non-traded business development companies (BDCs) and interval funds, which have become the primary vehicles for individuals and high-net-worth investors to access the $2.3 trillion private credit industry.

So far, the funds have agreed to meet redemption requests, even when they exceeded quarterly limits that would allow a manager to restrict withdrawals, typically at 5% in a quarter. Blackstone’s flagship $79 billion private credit fund, the industry’s largest, faced redemption requests of $2.1 billion in the fourth quarter, or about 4.5% of the fund. That was up from 1.8% in the third quarter.

Ares’ $23 billion Strategic Income Fund reported withdrawals of just under $600 million, or 5.6% of its net asset value. BlackRock’s $25 billion HPS Corporate Lending Fund saw redemptions climb from 1.6% to 4.1%, or about $475 million, in the last quarter.

Investors sought to redeem 5% of their shares from a $34 billion Blue Owl fund known by its ticker OCIC, according to a person briefed on the matter. In contrast, redemptions from the firm’s tech-focused investment fund surged from 2.6% to around 15%, a senior executive at the firm said last week. Seeing the increase, the firm raised its redemption cap to 19.3%, allowing investors to exit.

Despite the outflows, funds managed by Apollo, Ares, Blackstone, BlackRock, Barings, and Oaktree have continued to take in more new money than they have paid out, according to Barclays analysts. This has limited the need to tap available cash or sell assets to raise capital.

All the funds have access to bank credit lines to finance withdrawals, and some hold a portfolio of liquid loans they could sell if needed. Peter Troisi, an analyst at Barclays, said new investment into BDCs has also slowed since August, with December inflows falling 26% from the previous month, based on the few funds that have already reported.

Executives hope the funds’ willingness to meet redemption requests will bolster confidence in the private credit industry and help differentiate the asset class from real estate, which was hit hard by the Fed’s rate hikes in 2022. Several real estate funds imposed redemption limits as property values fell, including Blackstone’s giant fund known as Breit.

Investors are watching for signs of distress, including a rise in private credit loan defaults. So far, however, analysts report that credit quality remains stable. Blue Owl said its tech fund’s performance remained “strong” and the portfolio was “well-positioned and under-levered against our target, we maintain significant liquidity for investments and obligations.”

Ares told clients of its fund in December that its investments remained “healthy” and that it would commit to maintaining its dividend through June. Blackstone said that “investors continue to recognize the premium that private credit can deliver over public fixed income.”

Cliffwater’s Hasbrouck said the firm is “not concerned about our ability to perform, knowing we have plenty of liquidity and believe things will get better quarter over quarter.”

BlackRock and Oaktree declined to comment.