Private credit’s ‘off-ramp’ emerges as investors look to cash out
Key Points
- Semi-liquid private credit vehicles have curbed withdrawals as investors scramble to withdraw their money.
- A “robust and growing” secondaries market could help ease pressure amid concerns over squeezed liquidity.
Private credit investors may have a potential “off-ramp” as pressure to cash out of the $3 trillion industry grows. Asset managers in the sector, where so-called semi-liquid funds have expanded into the retail wealth market, have scrambled to restrict investor withdrawals in recent weeks, as concerns that bad loans could spark a surge in default rates and a ‘dash-for-cash’ among investors Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said there is a “robust and growing, and highly innovative” private secondaries market — where investors sell stakes in private funds to other buyers — that could serve as a pressure valve for investors looking to exit without forcing managers to sell underlying loans. Haldea pointed to Saba Capital, Boaz Weinstein’s activist hedge fund firm, which, along with Cox Capital Partners, is launching tender offers to buy stakes in a number of private debt vehicles, including some managed by Blue Owl Capital . “We’ve seen Boaz Weinstein at Saba Capital become very public about the fact that he’s offering tender solutions to BDC investors in these private credit funds to give them liquidity off ramps,” Haldea told CNBC’s “Squawk Box Europe”. “You’ll see more and more usage of the secondaries market to get off-ramps to some of these semi-liquid vehicles, where retail investors didn’t potentially understand… this was illiquid paper. You can’t force a sale of the paper just because you want a redemption.” Rising redemptions The recent spike in redemption requests across private credit has raised fresh questions about the suitability of the industry’s higher-yielding, but less-liquid, vehicles for retail investors. Haldea said gates on semi-liquid products have “gone up left, right and center”, and would “continue to do so”. She added that certain products and structures designed for institutional investors have been “repackaged and repurposed” in private wealth channels as semi-liquid products, which “makes it dangerous”. OWL 1M mountain Blue Owl Capital. Cliffwater last week moved to curb investor redemptions from its flagship Cliffwater Corporate Lending Fund after requests surged to 14%. The firm, which has about $70 billion in committed private debt assets, agreed to purchase about 7% of the fund’s shares. Separately, Morgan Stanley limited withdrawals in its $7.6 billion Northaven Private Income Fund as redemption requests ballooned to 11% in the first quarter. Cliffwater is the firm Saba Capital is “watching the most closely”, Weinstein told CNBC in a recent interview . ‘A mark-to-market mentality’ Saba Capital’s tenders include a plan to buy 6.9% of shares in the non-traded Blue Owl Capital Corporation II, also known as OBDC II, at $3.80 per share in cash. Blue Owl Capital Corp. II — a business development company aimed at U.S. retail investors — last month overhauled its quarterly liquidity terms and sold off a chunk of direct lending assets to several North American pension funds in a secondary-style deal to provide liquidity for investors. Haldea cautioned that the secondary market could struggle to absorb a large wave of redemptions if investor sentiment deteriorates sharply. “Is that market big enough to support if the floodgates completely open and there’s contagion across the board? No, it’s not. But is it enough today? We’re seeing that it is — that these organizations are coming together quickly to organize liquidity,” she added. Chris Kotowski, senior analyst at Oppenheimer & Co., said that limits on withdrawals are “a feature, not a bug,” because the funds invest in illiquid loans intended to be held to maturity. Kotowski told CNBC’s “Squawk on the Street” that many commentators still have a “mark-to-market mentality”, adding that private debt structures allow funds to capture an illiquidity premium and avoid forced sales during market stress. “The liquidity limitations are meant to create total return over time,” he said. While recent market jitters have rattled investors, Kotowski said private credit managers have historically emerged stronger from downturns because of their longer-term capital structures. “The market is highly unfamiliar with how resilient these companies are,” he said. “Out of every major credit cycle, they have come out much stronger.” Rising defaults That structure is now being tested, however. Industry pros fear the underlying loan quality and the sector’s exposure to software companies at risk of disruption from AI could push defaults well above their historic average of about 2%. In a recent interview with the Financial Times, Partners Group chair Steffen Meister said default rates could double in the next few years, while Morgan Stanley analysts suggested defaults could reach 8%, according to a Bloomberg report Tuesday. “Were there loans written that have covenants that were a little too light and terms that will be breached? Absolutely,” Haldea said, adding that defaults could climb further as weaker loans move through the system. “The penny has not finished its fall yet.”
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