The world's largest alternative asset manager is confronting a difficult choice: either block investor exits from private debt funds and face potential backlash, or honor redemption requests while deviating from core principles. For months, executives in the private credit industry have sensed an impending reckoning. A series of high-profile failures has shaken investor confidence. Concerns are mounting over the sector's significant exposure to software companies vulnerable to disruption from artificial intelligence (AI). Concurrently, retail investors, who funds spent years attracting, have begun withdrawing capital from some of the industry's largest funds, putting pressure on redemption limits designed to prevent forced sales of loan assets.
Subsequently, BlackRock drew a line. The firm announced it would limit redemptions from its $26 billion HPS Corporate Lending Fund to 5% of its net asset value, after investors sought to withdraw nearly double that amount. This marks the first time a major private credit manager has restricted redemptions for a perpetual fund since market tensions began. This move is unsettling for an industry that has ballooned to $1.8 trillion and is on the verge of entering the US 401(k) retirement account market. It could provoke a backlash from retail investors increasingly anxious to retrieve their money. It also reinforces long-standing warnings from skeptics about the risks of selling illiquid assets to clients prone to panic.
However, in private discussions, many industry executives expressed that they had hoped a giant like BlackRock would take this step first, providing "cover" for others to follow. They argue the alternative—honoring all redemption requests—carries greater risk, with impacts potentially extending far beyond the current quarter. This could tie up capital needed for new deals, harm long-term investors, and set expectations these funds were never intended to meet.
John Zito, an executive at Apollo Global Management, stated in an interview that HPS and BlackRock's decision was "absolutely the right thing to do." He added that these products are designed "to protect both the redeeming and remaining investors by matching the liquidity of the vehicle with the liquidity of the underlying assets."
Redemption requests for non-traded Business Development Companies (BDCs) have exceeded the standard 5% limit. Whether other firms will follow suit remains an open question. Barclays estimates that funds managing over $100 billion will disclose first-quarter redemption requests and their corresponding handling plans in the coming weeks.
Similar to hedge funds investing in hard-to-trade assets, loans made by private credit firms often cannot be sold quickly. To avoid forced asset sales at depressed prices during investor panic, most retail-focused funds incorporate structural limits, typically capping quarterly redemptions at 5% of net assets. However, this cap is not always strictly enforced. In recent months, some managers have allowed redemptions exceeding this limit, while emphasizing their overall portfolio health and strong returns, hoping such flexibility would ease investor nerves. This approach has sparked debate over whether short-term image management is overriding long-term discipline, potentially rewarding the first investors to exit.
Some executives even oppose labeling the redemption cap a "gate," arguing it is a fundamental part of the fund's structure. Not enforcing it weakens that structure. John Kirk, Deputy Chief Investment Officer for Credit at Corbin Capital Partners, stated, "You cannot create liquidity from an illiquid asset class." He added that not enforcing limits "creates a first-mover advantage for early redeemers and leaves remaining investors in a prisoner's dilemma."
Blackstone adopted an unprecedented approach, allowing investors significant withdrawals while demonstrating confidence in private credit's recovery. The firm permitted investors to redeem a record 7.9% of its flagship $82 billion private credit fund, BCRED. To meet this demand, it utilized approximately $150 million from personal investments by more than 25 senior executives and about $250 million of its own capital. People familiar with the matter said Blackstone had prepared for redemptions exceeding 5%, given high demand last quarter. Management, referencing net flows and liquidity, quickly deemed both sufficiently healthy to allow full redemptions. This move breached not only the standard 5% quarterly limit but also the typical 2-percentage-point buffer.
Previously, Blue Owl Capital allowed redemptions exceeding 15% of net assets from its tech-focused fund in last year's fourth quarter. Michael Paulus, founder of private wealth manager PCM Encore, called Blackstone's decision a "highly strategic, long-term move" in the current anxious environment. He stated, "The combination of allowing full redemptions and having employees put significant capital to work sends a very strong confidence signal to the market."
The window for action is closing across the industry. Other non-traded BDC managers face similar pressure. Last quarter, a fund managed by Ares Management fulfilled redemption requests of about 5.6%, one of the earliest instances of handling requests slightly above the repurchase offer size. Many large BDCs, including those managed by Apollo Global Management, Ares Management, and Blue Owl Capital, are still in their first-quarter redemption window, with investors actively deciding whether to withdraw. Most funds continue to attract new money, but inflows are now lower than outflows.
If more of these self-described "semi-liquid" funds face large redemption requests, they confront two unappealing choices. Blocking redemptions "tends to damage client relationships and could lead to further redemptions from investors who weren't planning to exit, as they may interpret it as a sign of distress," said Zain Bhojani, Associate Director of Risk and Valuation at S&P Global Market Intelligence. Conversely, allowing outflows during market weakness contradicts the principles of many private asset investors.
Mike Patterson, Co-Founder and Co-President of HPS, said in a video to investors that restricting redemptions "allows us to optimize investment performance because we only have to deal with predictable liquidity needs." He added, "You never want to be forced to sell illiquid assets because of short-term cash needs," stating the decision leaves the fund "well-armed in what we believe is an increasingly attractive market."
The accelerating withdrawal wave hits the private credit industry at a critical juncture. As inflows from large institutions like pensions and sovereign wealth funds slow, fund companies are aggressively competing for high-net-worth individual clients. They market to financial advisors and even partner with professional athletes for branding. Private market advocates are also close to a major policy victory. Last year, an executive order signed by the US President made it easier for alternative assets like private credit and equity to access 401(k) plans, part of broader reforms to allow these assets to tap into trillions in retirement savings. The US Department of Labor is expected to issue guidance soon, effectively greenlighting alternative asset investments for 401(k) managers.
Simultaneously, there is growing focus on the deepening ties between retail investors and private credit. The non-traded BDC structure is a primary vehicle for this market access. Through financial advisors, retail investors can typically contribute monthly and redeem quarterly at 100% of net asset value, with minimum investments as low as $2,500.
Another category of BDCs trades on major exchanges, accessible to any investor. These products have different structures and don't face redemption pressure, but recent volatility is hard to ignore. Several have recently cut dividends, and more investments are being classified as "non-accrual" assets, indicating problematic loans. Trading on public markets, the reaction is swift and direct. Several publicly traded BDCs are near historic lows, trading significantly below their net asset value. BlackRock TCP Capital Corp. closed last week at a record low of $3.82 per share, down over 50% from a year ago. Bearish bets against Blue Owl Capital reached a record high last week, even after its stock posted its largest monthly drop on record in February.
Against this backdrop of "historic" events, the rush by non-traded BDC investors to exit is unsurprising. The market had anticipated some retail outflows from private credit as falling interest rates compressed yields. However, credit risk has accelerated this trend. According to Fitch Ratings, the US private credit default rate rose to 5.8% in the 12 months through January, the highest since it began tracking the data. Some analysts project even grimmer scenarios regarding AI's impact on software companies. UBS strategists, led by Matthew Mish, suggested that given the sector's exposure, default rates for private loans could reach 15% in a worst-case scenario—a forecast strongly rebutted by Ares Management's CEO as "effectively irresponsible."
For proponents of redemption limits, both realized and potential credit losses are a key reason other BDCs should emulate the HPS fund. They argue the mechanism's purpose is precisely to prevent a vicious cycle: forced asset sales to meet redemptions hurt remaining investors and trigger further withdrawals. In 2022, Blackstone imposed similar restrictions on a real estate fund facing pressure, later securing a $4 billion investment commitment from the University of California, which helped restore confidence.
Restricting redemptions also gives funds breathing room to operate as designed—using new capital to make new loans. Managers can deploy fresh money into attractive investments rather than using it to pay exiting investors. "Redemption gates are a feature, not a bug," said Vivek Bantwal, Global Co-Head of Private Credit at Goldman Sachs Asset Management. His comments echoed those of BCRED's Co-CEO the day after the fund's record redemption was disclosed.
However, for investors, these arguments may ring hollow amid discussions of a potential 18-month period of pain for private credit—especially if financial advisors did not fully explain what redemption limits mean during credit stress. Despite this, boutique investment bank Robert A Stanger & Co., a long-time BDC tracker, sees BlackRock's decision as a watershed moment. "Now that HPS has done it, we expect others to follow," said Michael Kavelow, Executive Managing Director.
Analysts on Wall Street show little sympathy for retail investor panic in this market. Evercore ISI analysts noted last week, "Semi-liquid funds were designed and marketed to provide limited liquidity in times of stress. The important thing now is re-educating investors about the nature of private assets."
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