In the second quarter, the pressure on private credit funds intensified, as investors attempted to pull out more capital while receiving less in return.
During Q2, investors requested withdrawals totaling $15.6 billion from widely held private credit funds, an increase from the approximately $13.9 billion they sought to withdraw in the prior quarter.
Despite the rising requests, data from investment bank Robert A. Stanger shows fund managers returned $5.9 billion in the second quarter, down from the $7.4 billion they agreed to pay out in the previous quarter.
These statistics highlight two clear trends:
First, individual investors have realized they cannot exit these funds, known as business development companies (BDCs), as quickly as they entered them, prompting a growing number to seek redemptions.
Second, fund managers are bracing for potentially sustained high redemption rates. While large firms like Blackstone chose to meet all redemption requests in the first quarter, they have now capped redemptions at 5% to preserve capital for future investor needs.
Redemption requests have surged at most major fund management firms, including those less affected in Q1, such as Apollo Global Management and Ares Management, as well as BlackRock's private credit unit, HPS.
As a bellwether for selling private credit funds to individual investors, Blue Owl has seen some improvement. Redemption requests for its largest BDC fell to about 19% of its outstanding shares, down from roughly 22%. However, this rate still remains higher than that of any of its major competitors.
A notable bright spot: redemption requests for a fund managed by Oaktree Capital Management dropped significantly, from 8.5% in Q1 to 4.5% in Q2. According to research from Raymond James, this fund was one of the few BDCs to see net asset value growth and have no non-performing loans in the first quarter.
While the acceleration of outflows from BDCs this spring is concerning, the slowdown in new inflows is even more troubling. Fundraising across the industry in May was approximately $500 million, the lowest inflow in at least 18 months and a drop of about 75% from already subdued levels in January.
If new sales remain persistently weak, it will hurt fund managers, who rely on fund growth to boost their share prices. Sales performance could also drag on economic growth. Private credit funds primarily invest by lending to companies with lower credit ratings, which many banks are reluctant to finance.
If these funds cannot raise fresh capital to offset losses from withdrawals, their lending capacity will decline. This would hinder stronger borrowers from investing and expanding, and could trigger defaults among weaker borrowers, such as software companies facing displacement by artificial intelligence.
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