Private credit redemption pressure eases as withdrawals slow

Private credit turmoil is easing as investor withdrawals slow, and defaults have begun to wane¹. Private credit funds saw signs of stabilising in September as redemption requests from individual investors eased and investment performance improved². Fund performance has improved alongside the slowdown in redemption requests².

Redemption pressure is easing as retail investor withdrawals slow, though limits and weak inflows persist³. Fund redemptions eased in the third quarter, which points to reduced investor anxiety over corporate default risks in the private credit market⁴.

What it does not settle

Investors seeking to cut their exposure to private credit are still having to wait to withdraw their money¹. Blue Owl Capital made headlines earlier this year when it limited withdrawals from some of the non-traded private credit funds it oversees⁶. Its stock now yields about 9% after falling 45% from its high⁶. The withdrawal limits Blue Owl imposed are the clearest example of how the gates worked in practice during the stress⁶.

Analysts at Morningstar DBRS, hunting for the corners of the debt markets where issuers are most vulnerable, concluded that private credit is among them⁷. Other fund managers have been dialling back risk⁷. The asset class has reached $2.5 trillion, which is now greater than the size of the US high-yield market⁸. That growth was accelerated by the same regulatory shift that created the sector⁸.

What to watch

The boom traces back to regulations put in place in the wake of the 2008 financial crisis, and the asset class is now facing highly public questions despite its reputation for high risk⁵. Private credit is facing highly public questions about its structure, and one critique has called the asset class a false promise^5,8.

Three tests follow from this week’s data. Whether inflows return, rather than outflows merely slowing, since weak inflows are still reported alongside the easing³. Whether the gates come off, given that redeeming investors are still queuing even as the pressure abates¹. And whether manager economics hold, with Apollo Global’s dividend sustainability among the questions raised alongside the redemption figures⁴. For listed managers, the distinction that matters is between a liquidity problem that is receding and a credit problem that Morningstar DBRS says has not^4,7. Redemptions easing in the third quarter is the datapoint; whether it marks a turn or a pause is not yet established^3,4.