When news surfaced about huge redemption requests at one of Blue Owl’s private credit funds last fall, Angela Miller-May, the chief investment officer of the Illinois Municipal Retirement Fund, immediately reached out to the firm.
The $60 billion Illinois pension fund wasn’t invested in the Blue Owl fund in question, which is a non-traded business development company, or BDC. Such semi-liquid vehicles are marketed to retail investors not institutions. Even so, Blue Owl’s attempt to fix the problem by freezing redemptions in the BDC as it tried to merge that fund with a publicly traded Blue Owl vehicle raised the first concerns about the health of the loans the BDC owned — concerns that have since metastasized throughout the private credit world. The issue for Miller-May was that IMRF is invested in Atalaya, a private credit firm that Blue Owl purchased in 2024. Did Atalaya own any of the same loans as the Blue Owl BDC, she wondered.
“We had to have conversations and discussions with Blue Owl,” she says. “We had to ensure that it was not affecting IMRF’s investments. And after talking to the manager and doing our due diligence, we determined that the redemptions were in fact totally separate from our fund investments.”
Ever since those Blue Owl investors clamored to get out in November, private credit has become one of the most hotly debated topics in financial markets. Non-listed BDCs typically offer investors the ability to take out up to 5 percent of the fund quarterly, with some leeway, but investors have wanted more. After Blue Owl scrapped the earlier merger because of the huge losses it would have created for investors, redemption requests at another one of its funds hit 41 percent, and 22 percent at another. Big redemption requests have surfaced at BDCs run by other brand-name private credit funds, including those offered by Apollo, Ares, Blackstone, BlackRock, Morgan Stanley, and even Cliffwater.
Most of those firms have said they would not give investors all the money they wanted, arguing that caps on redemptions were designed to protect all investors in the funds. But some made concessions. Blackstone recently said it would allow investors to pull a record 7.9 percent of shares from its flagship private credit fund. To a large extent, the redemptions began with concerns about the BDCs’ huge exposure to software companies whose future now seems under pressure from AI. In a surprise move, Fitch Ratings recently said defaults in the private credit universe of companies it follows had hit an average 9.2 percent. And Moody’s has revised its outlook for nontraded private credit investment vehicles to negative. Even funds themselves are being downgraded. In late March, a listed BDC managed by KKR and Future Standard was downgraded to junk status by Moody’s due to what the rating agency called “continued asset quality standards.”
With almost $2 trillion in outstanding loans, private credit is a part of the so-called shadow banking system that touches every corner of the financial system. And U.S. banks, which had lent about $300 billion to private credit providers as of last June, according to Moody’s, have also gotten jittery. J.P. Morgan, for example, marked down the value of the collateral it holds for some private credit firms, limiting how much money J.P. Morgan will lend them, according to a report in the Financial Times. The markdowns target software company loans.
Institutional investors that have rushed into private credit in recent years aren’t directly affected by the BDC redemptions. But the drama surrounding private credit is forcing these investors to take stock of the sector, worrying what effect it could have on their own investments in private credit, even as these funds are continuing to post the returns and low volatility that institutions love.
They also have to worry about how this crisis will affect the entire market. Is this just retail investors being nervous or the harbinger of an impending credit cycle? Is the availability of finance going to shrink, will new investments dry up, and will marked-down values eventually migrate to the funds they own?
No one seems to know where this is headed.
“The largest contributing factor to this situation right now is just that the private credit markets are so opaque,” says Beth Mueller, managing director for the Americas at Suntera Fund Services, an administrator for private credit funds.
You can read the rest of the story on Institutional Investor here:
https://www.institutionalinvestor.com/article/how-institutional-investors-are-managing-private-credit-crisis
Michelle Celarier 