Private credit storm spreads! Gundlach warns: Retail investors are realizing they are the "bag holders."

The $1.8 trillion private credit market is facing a harsh reality check. As asset valuations decline and redemption pressures surge, retail investors are finding themselves trapped in a liquidity trap, while Wall Street’s large banks are being forced to shoulder massive paper losses on their balance sheets due to the cooling of leveraged finance deals.

On May 7, according to Bloomberg, DoubleLine Capital CEO Jeffrey Gundlach issued a stern warning at the Milken Institute Global Conference in Beverly Hills. He pointed out that as the underlying risks of private credit funds become exposed, retail investors drawn into the sector by financial intermediaries driven by high fees are gradually realizing they may have become the true “bag holders.”

Meanwhile, risk is spreading to Wall Street's top investment banks. According to Bloomberg, the bank consortium led by JPMorgan is expected to bear more than $500 million in paper losses in a debt financing deal for software company Qualtrics, making it the largest “hung deal” in this year's leveraged finance market, highlighting the direct impact of the sharp shift in market sentiment on institutional investors.

Under the dual pressure of liquidity tightening and valuation downgrades, leading private credit institutions including Blue Owl, Apollo Global, and Oaktree are cutting their funds’ net asset values and reducing dividends. The entire industry is facing a crisis of confidence, forcing some institutions to seek market reassurance through increased valuation transparency.

The “Semi-Liquidity” Trap and Retail “Bag Holders”

Gundlach offered pointed criticism of the state of the private credit market, especially targeting financial advisors and intermediaries that brought retail investors into so-called “semi-liquid” funds.

He argues that these intermediaries are often motivated by earning high fees, and have not fully explained to clients the offering documents’ redemption restriction (gating mechanism) clauses. Gundlach stated:

"These products have always remained opaque and lack detailed descriptions. That’s why everyone wants their money back: they’re starting to realize they may be the ‘bag holders.’"

He especially questioned the label “semi-liquid”, calling it “somewhat nasty,” since “it’s liquid when you don’t need the money, and illiquid when you do.”

The private credit industry previously regarded retail investors as a new source of capital to supplement institutional funds, but is now facing a wave of redemption requests. As cracks emerge in the market, institutions are scrambling to limit retail redemptions.

Gundlach compared the current private credit market to the internet bubble era and subprime mortgage-backed securities of 2006, and warned that even if high-risk credit can be temporarily hidden in the private market, “people are going to lose money here.”

JPMorgan Deep in Heavy Losses as Leveraged Finance Market Cools

The turmoil in the private credit market affects not only retail investors; it has also exacted a heavy price from Wall Street's major banks.

According to Bloomberg, the JPMorgan-led bank consortium is preparing to use its own balance sheet to provide $5.3 billion in debt financing for Qualtrics’ acquisition of Press Ganey Forsta. This passive move is expected to cost the banks more than $500 million in paper losses.

The financing plan originally included $3.3 billion of leveraged loans and $2 billion of junk bonds or private credit. However, due to the rapid development of artificial intelligence causing investors to reassess the business model of the software sector, Qualtrics’ existing term loan price dropped to 84 to 86 cents on the dollar in March. At this level, investors prefer to buy existing debt rather than participate in new issues, forcing the bank consortium to suspend the official syndication process.

Qualtrics is not alone. In February, a consortium led by Deutsche Bank failed to sell about $1.2 billion of loans supporting a Thoma Bravo-backed acquisition of Conga Corp; recently, after halting preliminary talks, a bank led by UBS also left a $765 million logistics company acquisition loan on its balance sheet.

Banks typically hope to quickly resell debt to institutional investors before closing deals in order to earn fees. Once debt is stuck, it directly weakens their ability to participate in new transactions.

Asset Impairments Spread, Leading Institutions Mark Down Valuations

Against a backdrop of market volatility and a selloff in tech stocks, Blue Owl, at the center of the private credit crisis, has started to take action.

According to regulatory documents released on Wednesday (May 6), in the three months ending March 31, the firm marked down the net asset value of its $14.1 billion technology business development company (BDC) by about 5% to $16.49 per share; the $15.3 billion Blue Owl Capital Corporation value also dropped nearly 3% to $14.41 per share.

In the face of tightening liquidity, Blue Owl cut its largest funds’ dividends from 37 cents per share to 31 cents, and repurchased $85 million of stock to boost net asset value. Nonetheless, Blue Owl’s co-president Craig Packer said in a statement that the underlying credit trends of companies in its portfolio remained healthy.

Other institutions were not spared either.

MidCap Financial Investment Corp, managed by Apollo Global, reported a quarterly net loss of 30 cents per share, compared with a year-ago profit of 32 cents per share, due to wider credit spreads and some weakening credit positions.

CEO Tanner Powell said non-accrual loans (usually meaning borrowers failed to pay debt on time) climbed from $48.5 million a year earlier to about $167 million.

Additionally, Oaktree Capital Management this week marked down one of its private credit funds by nearly 4%, while Sixth Street Specialty Lending also cut dividends and reported a drop in net asset value.

As more and more institutions reveal the gap between their balance sheet asset values and reality, the private credit industry’s opaque valuation model is coming under close scrutiny. To restore market confidence, some institutions are taking proactive steps.

Apollo Global CEO Marc Rowan told analysts during the first quarter earnings call that the company plans to provide daily valuation services for its private credit fund investors by the end of September. Rowan said: “This is the beginning of standardization for the whole market.”

Currently, most private investment funds only provide asset valuations to investors quarterly, meaning the public must wait at least three months to learn the latest standings of portfolios. Unlike stocks or public bonds, the lack of real-time updates increases investor anxiety.

Analysts noted that Apollo’s move is aimed at generating daily prices by observing other trades, comparable assets, and market trends, thereby easing concern about the health of this opaque lending world.

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