'Bubble deflated': investors take billions out of private credit funds

Wealthy investors tried to withdraw more than $10 billion from several of the largest private credit funds in the first quarter, forcing management companies to limit withdrawals. This jeopardized one of the key sources of growth for Wall Street and prompted comparisons among some market participants to the first signs of the 2008 financial crisis, writes the Financial Times.

Private credit funds managed by large investment firms - Blackstone, BlackRock, Cliffwater, Morgan Stanley and Monroe Capital - have agreed to return to investors about 70% of the $10.1 billion they requested during the current quarter, the newspaper estimated.

Withdrawal requests are expected to rise in the next two weeks when funds managed by Ares Management, Apollo Global Management, Blue Owl Capital, Oaktree Capital Management and Goldman Sachs reveal their data, the publication notes.

The withdrawal of funds caused a strong sell-off in shares of management companies such as Blackstone, KKR, Blue Owl Capital, Ares Management and Apollo Global Management. Since the beginning of the year, their securities have fallen by 25% or more, and their combined market capitalization has fallen by more than $100 billion, the FT notes. Investors' concerns were heightened amid a sell-off in software developer stocks in early February. This sector is one of the largest borrowers of private credit funds, notes Movchan's Group.

Some on Wall Street, including former Pimco director Mohamed El-Erian, believe the market is reminiscent of the early days of the 2008 financial crisis. At the same time, many private equity executives told the Financial Times that they are puzzled by the massive sell-off, which they believe does not reflect the real state of affairs.

"We know how the mass investor behaves. He's fickle, chasing yield and walking away as soon as he senses danger," said Morningstar analyst Jack Shannon.

The funds that have already reported outflows are managing about $166 billion in assets - a small fraction of the roughly $1.5 trillion invested in direct lending funds, the newspaper reports. Nevertheless, these funds have become one of the fastest-growing segments of the private equity industry and an important tool for management companies looking to enter the $9 trillion U.S. pension savings market.

Ongoing withdrawals have interrupted a five-year period of growth, with Goldman Sachs estimating that retail private credit fund assets rose from $34 billion at the end of 2021 to $222 billion by the end of last year. The inflows have helped boost the profitability of private-equity firms: their market valuations have risen to 30-40 per annum fee profits, giving them a marked premium over other financial firms - banks, insurers and the market as a whole, the FT notes.

Money was actively flowing into retail private credit funds and similar investment products that finance corporate buyouts, real estate deals and infrastructure projects. For many management companies, especially Blue Owl and Blackstone, it was such assets that became the main driver of growth, the newspaper reports.

Now the reversal of the trend has investors questioning whether previous high valuations of companies in the sector are justified compared to the broader market.

After a wave of withdrawal requests that showed investors can't always get their money back quickly, Goldman Sachs now predicts such funds could lose between $45 billion and $70 billion in assets over the next two years.

"The bubble has deflated and the whole industry is under serious pressure," said Xi T. Fitzpatrick, CEO of Vulcan Value Partners, which invests in publicly traded private-loan companies. "A pretty broad brush has been walked all over the industry," he said of the selloff. - People don't distinguish between companies with stronger business models and companies with weaker business models."

This article was AI-translated and verified by a human editor