Recently, a wave of redemptions sweeping through the private credit market is roiling Wall Street and has already transmitted to the secondary market, triggering a broad decline in the stock prices of banks and asset management companies. On Thursday, Morgan Stanley (MS) saw its stock price drop over 4%, hitting its lowest point since last October, following news that one of its private credit funds had restricted withdrawals. Simultaneously, several other alternative asset management giants also moved lower, with Apollo Global Management (APO), KKR & Co (KKR), and Ares Management (ARES) all experiencing declines exceeding 3%. The banking sector also came under pressure, with the KBW Bank Index falling 2.5%, marking its sixth consecutive daily decline.
The trigger for market concern is the large-scale redemption requests from investors in private credit funds. Prior to Morgan Stanley, BlackRock had already taken the lead in imposing redemption restrictions on one of its corporate loan funds, sized at $26 billion, allowing investors to redeem only 5% of assets, while the proportion of requested redemptions was nearly double that figure. This move, being emulated by other institutions, highlights the payment pressure faced by these funds invested in less liquid assets during times of market anxiety.
This turmoil has thrust the private credit market, now amounting to $1.8 trillion, into the spotlight. To cope with redemption pressure, some institutions have adopted different strategies. According to reports, Blackstone allowed investors in its flagship fund to redeem a record 7.9% of their shares, even utilizing executives’ personal funds to meet the demand. Meanwhile, Blue Owl Capital clarified to investors that its recent loan sales contained no clauses that might trigger moral hazard. Although the company’s stock price briefly fell nearly 5%, data indicated it had entered technically oversold territory.
Privately, industry executives believe that while restricting redemptions might trigger backlash from some retail investors, fully meeting all requests would not only tie up capital intended for new investments but also harm the interests of long-term investors. In their view, this is a necessary step to set reasonable expectations and maintain the long-term stability of the funds.
As pressure mounts, major banks are also beginning to take precautionary measures. It is reported that JPMorgan Chase has started to re-evaluate the value of its private credit investments held on its balance sheet and has tightened lending to such funds, with particular focus on loans to software companies. The bank’s CEO, Jamie Dimon, had already warned earlier that more problems might emerge in this opaque lending sector.
Christian Stracke, President of Pacific Investment Management Company, put it more bluntly, stating the industry is facing a “reckoning” – a crisis stemming from years of lax underwriting standards. He predicts default rates will rise and investor returns will decline in the future, but he also emphasized that as long as the U.S. economy remains healthy, it is unlikely to trigger a broader credit crisis. This marks a genuine test for the direct lending sector that has flourished since the 2008 financial crisis.
