Private Credit’s Liquidity Squeeze Puts Lenders in a Tight Spot

Redemption requests from investors in retail-focused private credit funds have reached an all-time high and show little sign of abating, according to Morningstar, as liquidity concerns spread through the $1.9 trillion private debt market. Funds marketed to mass-affluent and high-net-worth individuals, which are considered semi-liquid and typically offer quarterly withdrawals capped at 5% of fund value, now face elevated demands to cash out. Private credit managers globally raised $1.3 trillion from 2021 through last year, according to PitchBook data, much of it through evergreen vehicles sold via the wealth channel. That inflow is now slowing as investors seek exits.

Managers have responded in markedly different ways. BlackRock capped withdrawals from one of its flagship credit funds, HLEND, at 5% after receiving requests exceeding 9% of its value. In a letter to investors, BlackRock said the limit is "foundational" to the 10.7% annualized net return the fund has achieved since inception, warning that without it there would be a structural mismatch between investor capital and loan duration. Blackstone took a different course with its BDC, BCRED, which faced $1.7 billion of withdrawals above its 7% limit. Blackstone injected $400 million into the fund, with its own executives contributing personal capital, bringing redemptions within the cap and honoring all cashout requests. Blue Owl's tech-focused OTIC fund bought back shares worth more than 15% of its net asset value, well above the usual 5% quarterly cap.

The redemption wave has coincided with a sharp selloff in shares of major alternative asset managers and heightened public scrutiny of opaque, illiquid vehicles. Don Calcagni, chief investment officer of Mercer Advisors, which has $96 billion in client assets, said underlying loan portfolios remain healthy with little sign of distress, and that the turmoil may reflect investors misunderstanding the fund structures they bought. Blue Owl executives said there were no "red flags" in the portfolio of a fund the company is winding down, and Blackstone President and CEO Jonathan Gray called market concerns about redemptions "a ton of noise."

Mark Goldberg, an independent advisor to alternatives firms and former CEO of Griffin Capital, which Apollo Global Management acquired in 2022, takes a more pessimistic view. He said the industry has "lost control of the narrative" and expects a prolonged period of net outflows lasting up to two years. He estimates that by the second or third quarter of this year, more than 80% of debt-focused semi-liquid funds will see net outflows, forcing some managers to shrink balance sheets by letting loans run off or selling loans. Goldberg noted that traditional illiquid funds can hold loans to maturity, while semi-liquid funds facing periodic withdrawals cannot.

Matthew Malone, head of investment management at Opto Investments, said the structure's illiquidity means clients are reminded each quarter or month that their capital remains locked. Fund managers face a dilemma: relaxing liquidity caps may erode long-term portfolio value, while gating redemptions risks alienating investors. The next week should provide a clearer picture as managers' redemption windows close.