For months, the private credit industry has tried to quell widespread concerns about the soundness of their loans. And in an indication that its top executives thought their persuasions were working, Marc Lipschultz, a co-chief executive of the industry giant Blue Owl, said in late May that the “freak out” moment had passed.
Well, the latest results from Blue Owl on Thursday showed that investors were not done worrying about private credit, once the prized pig of Wall Street.
Blue Owl said it received withdrawal requests as high as 38 percent from one private credit fund focused on software and technology companies. Another, larger fund saw 19 percent of investor money try to leave.
Those figures were barely lower than the tally from one quarter earlier, 41 percent and 22 percent. That’s despite a cross-global effort by Blue Owl executives in the past few months to convince backers to stay with the firm.
Other big names like Apollo and Blackstone have also reported large investor withdrawal requests in recent weeks. And while the firms have publicly argued that their loan portfolios are not in any danger of default, they are limiting investor redemptions at 5 percent per quarter.
That has created an ever-extending queue of people hoping to get their money back.
“It’s a vicious cycle,” said Brian Shapiro, founder of the private investment platform ALTSMARK. “Everyone on earth is running for the same bright red exit sign.”
Until relatively recently, private credit was one of the envies of the financial world. A rebranding of the “junk bonds” of the 1980s and ’90s, it grew rapidly after the 2008 financial crisis thanks partly to regulations that discouraged banks from making high interest loans.
Thus a new cohort of firms were created to raise money from worldwide institutions such as insurers and university endowments to lend directly to fledgling companies that either could not or would not find funding from traditional banks. By some metrics, it is now a $3 trillion industry.
As private credit soared it also expanded from the so-called institutional base of its early days to raise money from “retail” investors, or individuals who put in money through mutual funds and similar vehicles called business development companies.
Chief among those catering to these smaller investors has been Blue Owl, whose stock is down 41 percent this year.
The firm cannot simply hand back money to investors who want it, because that would most likely mean selling off assets at a loss or borrowing money to do so. Neither of those moves would do much to restore confidence.
The firm’s specialized fund that was focused on loans to technology companies saw the highest withdrawals. Software-related loans have been particularly under the spotlight this year as the rise of artificial intelligence has raised questions about competing industries.
In a letter to investors, Blue Owl’s president, Craig W. Packer, wrote that “consistent with the prior quarter, shareholder retention remained strong, with approximately 90 percent of our 90,000 shareholders remaining invested in” the main fund. That means that it was larger investors who disproportionately asked for money back.
The firm said it remained optimistic. It flagged potentially higher interest rates as a ballast (many private credit loans charge “floating” rates that roughly track the Federal Reserve’s) and pointed out that, including borrowed money, it had nearly $12 billion in liquidity in its larger fund.
And it also has company. In June, giant private credit funds at Apollo and Blackstone also received double-digit-percentage investor withdrawals. They, too, have argued that their portfolios remain sound.
“It’s a trust business,” Jonathan Gray, Blackstone’s chief executive, told a Bloomberg podcast in May.
