Morgan Stanley caps private credit withdrawals again as 11% ask to leave

Morgan Stanley is curbing redemptions at its nearly US$7 billion private credit fund again in the third quarter, after investors requested exits amounting to 11%². The bank is restricting withdrawals from the flagship fund following what one account called a record rush for the exits¹. Withdrawal requests at the fund remained elevated in the third-quarter repurchase offer⁵.

This is a repeat rather than a first. The restriction is being applied again, after the fund was capped in an earlier period^1,2.

Size is not the point. The vehicle holds just under US$7 billion, which is small against the market it sits in, but the repurchase offer is the mechanism through which investors in such a fund can seek cash, and that mechanism has now been rationed twice^1,2,5.

Why it matters to investors

Investors have given reasons. Their concerns have included private credit underwriting standards and lenders’ exposure to older software investments³. Those are credit-quality questions rather than liquidity preferences, which is what makes the redemption pattern worth separating from ordinary quarter-end flows^3,5. Older software credits have been a specific focus of those questions³.

The market backdrop has moved in the same direction. The US private credit default rate has hit a record of 6.3%, according to Fitch⁴. A gated fund and a record default rate are two readings of the same underlying condition rather than two separate events^2,4. Fitch’s figure is a market-wide reading while the cap is a single-fund one, and the two arrived in the same week^4,5.

What to watch

The structural question is who ultimately carries the risk. Private credit funds a growing share of the lending channel, and banks in turn fund private credit, which leaves regulators without a full view of who owns the exposure⁶. That opacity is why a single fund’s repurchase offer attracts attention out of proportion to its size^2,6. The growth of the channel is what makes that visibility gap consequential⁶.

Three things follow. Whether the fourth-quarter repurchase offer is also capped will show if the exit requests are a level or a trend^2,5. Whether the default rate moves further above its record will indicate whether the underwriting concerns investors cited are being borne out^3,4. And whether other managers disclose similar restrictions will show whether this is a single fund’s problem or a channel-wide one^1,6.