The growing number of redemption requests from private credit funds raises new questions regarding the viability of this sector of global debt.
BlackRock is the largest asset manager in the world. It has for the first-time limited the withdrawals of one its private credit products, highlighting the growing unrest among investors as the volatility on financial markets spreads.
BlackRock shares fell 7% late in the morning, reaching their lowest levels since May. The firm stated that its HPS Corporate Lending Fund will stick with its plan of repurchasing only 5% of its stock this quarter. This would amount to approximately $620,000,000, even though it received significantly more redemption requests.
According to an investor letter sent on Friday, the fund known as HLEND received redemption requests for 9.3% of shares in its latest quarter.
The fund has now exceeded the quarterly redemption limit for the first time in four years.
Structures that are not compatible with liquidity limit their ability to function.
This decision shows a common feature in private credit: limited liquidity.
Private credit portfolios, unlike public bond funds consist primarily of small- to medium-sized companies which cannot easily be sold on the open market.
The managers argue that these limits are necessary to preserve returns and avoid forced asset sales.
HLEND’s fund managers claim that the fund has produced an annualized rate of return after fees of 10.7% since its inception. They also said that the redemption cap structure was designed to align investor capital to private loan investments with a long-term outlook.
In their investor letter, the managers stated that “HLEND’s deliberately designed liquidity framework is fundamental to enabling this return outcome”, specifically, the recurring 5% quarter share repurchase.
They argued that without such limitations, the fund would be at risk of a mismatch in terms of investor withdrawals and duration of loans.
Fear among investors is growing across the industry
BlackRock has made this move as the investor’s sentiment towards private credit is beginning to decline after years of rapid expansion.
Blackstone, a rival firm, was hit with a record number of withdrawals from BCRED’s massive private credit fund worth $82 billion.
The firm responded by temporarily raising its redemption limits from 5% down to 7%. It also deployed approximately $400 million in capital, from both the company and employees.
These contrasting answers show the tension fund managers face as investors evaluate the risks of asset classes.
Blue Owl has recently changed redemption payouts to future payouts. This is adding concerns over liquidity.
A series of defaults in the public eye — such as the bankruptcy of an auto parts provider and subprime lender from the US — have raised concerns about the credit quality of some portfolios.
The boom in the industry is tested by its first test
Over the last decade, private credit expanded as lenders filled the gaps created by the withdrawal of banks from lending to corporations following the global economic crisis.
Direct loans are provided to businesses outside of traditional bond markets.
Wealthy individuals are increasingly investing in so-called semiliquid funds, which allow for periodic redemption within certain limits.
The current wave of redemptions is one of the major tests of these structures.
Investors are seeking to remove funds from private loans due to market volatility and concerns over a possible economic slowdown.
BlackRock is expanding its private market presence as part of an overall strategy to increase fee income.
Last year, the firm acquired HPS Investment Partners in an effort to improve its capabilities for private credit.
The surge in redemptions suggests, however, that the boom of private credit may have reached a new phase after many years of fundraising records and high returns. Investors are now reassessing liquidity risk and credit quality.
The post BlackRock restricts withdrawals amid private credit redemptions may change as new information becomes available.
