Redemption stress test for private credit: Apollo stands firm, says "the market is just temporarily mismatched"

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The private credit market is facing pressure from large-scale withdrawals by retail investors, but industry giants are responding proactively.

Jim Zelter, President of Apollo Global Management, has publicly defended this asset class, describing the current wave of redemptions as "growing pains" rather than a structural crisis for the industry.

In an interview with Bloomberg TV on Thursday, Zelter said that reports about retail investors exiting private credit funds are just "a minor friction on the margins" of the direct lending sector, emphasizing that the rules restricting redemptions have long been clearly stated in black and white, and everything is operating exactly as expected. Shortly after Zelter's remarks, Blue Owl Capital announced that it would limit redemptions from two of its private credit funds, after investors applied to redeem about 41% and 22% of the two funds' shares in the first quarter this year.

This wave of redemption has affected several major institutions. Apollo’s $25 billion Business Development Company (BDC), Apollo Debt Solutions, set a 5% cap on redemptions of outstanding shares after investors applied to redeem 11.2%, meaning only about 45% of redemption requests were satisfied. BlackRock, Ares Management, and others have also imposed redemption limits on similar funds.

Redemption limits spread, blocking retail investor exits

BDCs, a form of private credit fund for retail investors, have recently seen a surge in redemption applications, triggering caps at various management firms.

The situation is particularly pronounced at Apollo Debt Solutions. According to a shareholder letter, the fund capped redemptions at 5% of outstanding shares, while actual redemption requests hit 11.2%, with just 45% of those requests ultimately fulfilled, a lower satisfaction rate than that of some peers.

By comparison, earlier this month, BlackRock set a 5% redemption cap on its $26 billion non-traded BDC, with investors seeking to redeem 9.3%. Morgan Stanley’s North Haven Private Income Fund’s pro rata redemption rate is similar to Apollo’s.

According to an earlier Bloomberg report, the current amount of investor money waiting to exit private credit funds has reached nearly $5 billion.

Zelter: Transparent rules, fiduciary duties fulfilled

Facing external doubts, Zelter directly cited the fund’s terms to back up management’s actions in the interview. "On page one, in black and white, is the 5% redemption structure, designed to protect all investors," he said. "We are fulfilling our fiduciary duties; it’s actually quite a straightforward conversation."

Zelter also attributed some of the current situation to inadequate information delivery on the sales side. At a conference in Asia last week, he said "certain distribution channels in certain regions" may have failed to fully communicate to retail investors the inherent risks of private credit, resulting in a mismatch between short-term redemption demand and the liquidity of the underlying assets.

He also emphasized that the fundamental reason for the widespread attention to private credit is that over the past 15 years, this asset class has generated substantial returns for institutional investors, "delivering compound growth well in excess of high-yield bonds and loan indices."

Industry executives push back, diverging from media narrative

Zelter is not alone.

Blackstone Co-Head of Credit Kenneth Caplan also recently noted that "there is a huge gap between media headlines and news cycles and what we are actually seeing in our portfolios," adding that default rates are currently at an extremely low level.

However, tension still exists between market reality and executive comments. As private credit is an illiquid form of leveraged finance, whether it is suitable for retail investors who require liquidity is coming under increasing scrutiny. The surge in redemption applications is partly due to market concerns about lending practices in the sector and some companies' exposure to risks from AI disruption.

Middle East tensions may influence sovereign wealth fund allocation

Beyond private credit discussions, Zelter also evaluated the potential impact of Middle East tensions on Apollo's strategic partners. He said that ongoing conflicts in the Middle East may prompt the region’s sovereign wealth funds to focus more on domestic markets: "When the conflict is over, they will need to focus on domestic capital spending."

However, Zelter said this impact is only marginal, and he has not recently observed any signs that these partners are deviating from their broader investment goals because of it.

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