Over $20 billion withdrawn in the first quarter! The private credit myth is shattered, with giants like Blackstone and Apollo caught in a wave of redemptions.

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The private credit industry is facing its most severe trust crisis since its rise after the 2008 financial crisis.

According to estimates by the Financial Times, in the first quarter, private credit funds received redemption requests totaling $20.8 billion, affecting industry giants such as Blackstone, Apollo, Ares Management, Blue Owl, and KKR. These funds manage a combined portfolio of about $300 billion, but so far have only fulfilled just over half of the redemption requests, forcing a large number of investors to wait for the next redemption window later this quarter to exit.

Moody’s downgraded its outlook for the private credit industry this week, citing “increasing redemption pressure” faced by funds as the reason. Morgan Stanley expects that given the industry’s high exposure to software companies, its default rate will rise from the current 5% to 8% over the next year. Meanwhile, the Federal Reserve and Treasury Department have launched probes into this wave of redemptions, and JPMorgan CEO Jamie Dimon also warned this week that due to easing lending standards, loan losses among highly leveraged companies will exceed market expectations.

Redemption Wave Sweeps Industry Giants, Retail Investors Become the Biggest Variable

The main force behind this wave of redemptions is the group of affluent individual investors that the private credit industry has vigorously courted in recent years. Unlike institutional investors such as pension funds and endowments, who make decisions from a long-term perspective, retail investors are typically more sensitive and volatile, and have long been dissatisfied with the redemption restrictions that are common in private credit products.

Faced with a flood of redemption requests, institutions have taken very different approaches. Blackstone and Oaktree have chosen to honor redemptions even when they surpass the 5% trigger threshold, in order to maintain market confidence. In contrast, HPS Investment Partners under BlackRock, as well as Apollo, Ares, Blue Owl, and Morgan Stanley, have chosen to restrict redemptions, arguing that cap mechanisms protect remaining fund investors and prevent forced asset sales at a discount.

Jefferies analyst Daniel Fannon pointed out, “Although fund managers repeatedly insist there are no underlying credit issues in their portfolios, that hasn’t stopped retail investors from lining up to get their money back.”

Software Company Exposure and Aging LBOs: A Dual Risk

Behind this wave of redemptions lie deep market concerns about the quality of the underlying assets in private credit.

In recent years, the private credit industry has provided massive financing to software companies backed by private equity, but the rapid advance of AI technology is reshaping the competitive landscape of the entire software sector, posing disruptive challenges to these companies’ business models.

At the same time, aging leveraged buyout (LBO) deals stuck in the hands of private equity firms have been slow to exit, with most of their funding coming precisely from private credit. As high interest rates and a sluggish M&A market persist, the liquidity risk of these assets is being transmitted to private credit funds.

Greg Obenshain, Director of Credit at Verdad Advisers, said that investor flight is often “the first chapter of most credit cycles,” adding that “capital flows are both a forward-looking indicator of distress—since they reflect market expectations of future trouble—and they help reveal the distress itself.”

Managers’ PR Pushback, but Regulators and Rating Agencies Are Involved

In the face of increasingly negative public sentiment, both Blackstone and Apollo have mounted public relations offensives in an attempt to reverse negative narratives about private credit.

Craig Packer, Co-President of Blue Owl, also told investors in one of its funds that “there is a clear gap between the public discourse about private credit and the actual trends in our portfolio.”

However, regulatory attention is now hard to avoid. The Federal Reserve and Treasury Department have initiated probes into this wave of redemptions, and Moody’s has also downgraded its industry outlook this week, listing “intensified redemption pressure” as a core risk factor.

Redemption Limits Provide a Floor for AUM, but Industry Growth Momentum Is Showing Cracks

It’s worth noting that despite the surge in redemptions, the existence of redemption caps means many funds’ assets under management are still continuing to grow.

According to investment bank RA Stanger, from January to February this year, the industry raised $3.5 billion through non-traded business development companies (BDCs), the mainstream investment vehicle for private credit, with several billion more flowing into interval funds.

But some Wall Street analysts believe that if the macroeconomy experiences a broader downturn, the private credit industry will face even more severe pressure tests. This asset class rose rapidly after the 2008 financial crisis, seizing the opportunity as regulations tightened and asset managers filled the funding gap left by big banks’ retreat, luring pensions and endowments with generous returns. Now, faced with both redemption waves and mounting regulatory scrutiny, whether this “myth” can continue is facing an unprecedented test.

Risk Disclosure and DisclaimerThere are risks in the market, and investments require caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situations, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk. ```