The $1.8 Trillion Private Credit Market Faces Redemption Wave! Giant BlackRock Takes the Lead in "Shutting Down"

According to Zhihu Caijing, the world's largest alternative asset managers are facing a painful choice—either prevent investors from exiting private debt funds and deal with potential backlash, or meet redemption requests, thereby deviating from their core principles.

For months, executives in the private credit industry have vaguely sensed that a reckoning is imminent. A series of high-profile defaults have shaken investor confidence. Market concerns are intensifying over the fact that private credit has significant exposure concentrated in software companies that are vulnerable to the impact of artificial intelligence(AI). Meanwhile, the retail investors that fund companies spent years courting have started to withdraw from the largest funds, putting pressure on redemption caps that were originally installed to prevent forced sales of loan assets.

Subsequently, BlackRock (BLK.US) drew a line. Last Friday, the company announced it would cap redemptions at 5% for its $26 billion HPS Corporate Lending Fund, while the amount investors had previously attempted to redeem was nearly twice that ratio. This is the first time since market stress began that a major private credit manager has limited redemptions for a perpetual fund.

For an industry that has ballooned to $1.8 trillion and is set to enter the US 401(k) retirement account market, this move is unsettling. It may spark backlash from retail investors, who are increasingly anxious to retrieve their capital. At the same time, this reinforces the warnings long sounded by industry skeptics—that selling illiquid assets to easily panicked clients is risky.

However, in private conversations, many industry executives admit they have been hoping that a giant like BlackRock would take the lead, providing "cover" for other firms. They believe the alternative is riskier: if all redemption requests are met, the consequences could far exceed the current quarter—not only squeezing capital used for new deals, but also hurting long-term investors and setting expectations these funds never intended to fulfill.

John Zito, an executive at Apollo Global Management (APO.US), said during an interview: "HPS and BlackRock’s approach is absolutely the right decision." He added that the "intended design of these products is to protect both redeeming and remaining investors by matching the liquidity of the vehicle with that of its underlying assets."

Whether other firms will follow suit remains uncertain. According to Barclays estimates, in the coming weeks, funds with more than $100 billion in assets under management will disclose first-quarter redemption requests and their responses.

Similar to hedge funds that invest in illiquid assets, private credit firms' loans often cannot be sold quickly. To avoid being forced to dump assets in panic, most retail-facing funds have built-in structural limits—typically allowing redemptions of no more than 5% of net assets per quarter.

Yet this cap is not absolutely rigid. In recent months, a few managers have allowed redemptions above that limit, stressing that their portfolios remain healthy and returns are strong. They hope this flexibility will soothe investor anxiety. But this practice is controversial—whether protecting short-term appearances is overriding long-term discipline, ultimately rewarding investors who exit first. Some industry executives even object to calling these caps "gates," since the ratio is embedded in fund structure. If not strictly maintained, this concept is undermined.

John Koch, deputy chief investment officer of credit at Corbin Capital Partners, stated, "You cannot create liquidity from an illiquid asset class." He said not enforcing redemption limits would "give early redeemers a first-mover advantage, leaving remaining investors in a prisoner's dilemma."

Blackstone’s “Highly Strategic” Move

Blackstone (BX.US) has taken an unprecedented approach—allowing investors to redeem while signaling confidence in a private credit rebound. Last week, the firm allowed investors to redeem a record 7.9% of its flagship $82 billion private credit fund BCRED. To meet demand, the company tapped about $150 million from more than 25 top executives' personal investments, as well as about $250 million of its own capital.

Sources noted that, given high redemption demand last quarter (including at BCRED), Blackstone had already prepared for redemptions above 5%. Management referenced net flows and liquidity, quickly determining both were healthy enough to allow full redemptions.

This move not only exceeded the standard 5% quarterly redemption cap, but also surpassed the typical additional 2 percentage point buffer. Previously, Blue Owl Capital (OWL.US) had allowed investors to redeem more than 15% of net assets from a technology-themed fund in Q4 last year.

Michael Paulos, founder of private wealth management firm PCM Encore, said in today’s highly anxious environment, Blackstone’s action is a "highly strategic, long-term move." He commented, "Allowing full redemptions combined with large-scale staff investment sends a strong signal of confidence to the market."

The Window Is Closing

Across the industry, other so-called non-traded Business Development Company (BDC) managers face similar pressure. Last quarter, an Ares Management (ARES.US) fund met about 5.6% of redemption requests—one of the first to handle redemption demand slightly above offer size.

Many large BDCs managed by Apollo Global Management, Ares Management, and Blue Owl Capital remain in their first-quarter redemption windows, with investors actively weighing whether to withdraw. Most funds are still attracting new capital, but new inflows are now less than redemptions.

If more of these so-called "semi-liquid" funds face large redemption demands, they will face two imperfect choices. Zain Bokhari, associate director of risk and valuation at S&P Global Market Intelligence, said, halting redemptions "can often damage client relationships and may prompt investors who weren’t planning to exit to redeem further because they interpret it as a sign of distress."

But allowing capital to flow out during market weakness runs contrary to the creed of many private asset investors. HPS co-founder and co-president Mike Patterson stated in a video to investors that limiting redemptions "allows us to optimize investment performance, as we only have to meet predictable liquidity needs." He added, "You never want to be forced to sell illiquid assets because of short-term cash needs." He emphasized that this decision allows the fund to operate with "adequate dry powder in a market we view as increasingly attractive."

A Critical Moment

The accelerating wave of redemptions comes at a critical moment for the private credit industry. As inflows from large institutions such as pension funds and sovereign wealth funds slow, funds are increasingly targeting high-net-worth individuals. They market products to financial advisors and even partner with professional athletes for branding.

Proponents of the private market are still lobbying for US policymakers’ support and are close to their biggest victory yet. Last year, President Trump signed an executive order making it easier for alternative assets such as private credit and private equity to enter 401(k) plans—a broader reform that could open access to trillions in retirement capital. The US Department of Labor is expected to issue guidance soon, essentially giving the green light for 401(k) managers to invest in alternative assets.

Meanwhile, there is growing scrutiny of the increasingly tight connection between retail investors and private credit. Non-traded BDC structures are one of their main ways into this market. Through financial advisors, retail investors can generally invest monthly and redeem quarterly at 100% of net asset value. Minimum investments can be as low as $2,500.

The Pain of Public Markets

Another type of BDC is listed on major exchanges, and any investor can purchase shares. These have a different structure and aren’t subject to redemption risk, but recent volatility is likewise hard to ignore. These funds have cut dividends multiple times recently, and more investments are now classified as "non-accrual assets"—loans facing issues.

Because these funds trade on open markets, reactions are swift and direct. Multiple listed BDC stocks are now near all-time lows and trade far below net asset value, including a fund that existed before BlackRock's 2023 acquisition of HPS Investment Partners. BlackRock TCP Capital Corp. closed last week at $3.82 per share—a record low, down more than 50% from a year ago.

Some investor signals suggest the pain may not abate soon. Bearish bets against Blue Owl Capital hit a record high last week, even though its share price saw the largest monthly drop on record in February.

The Credit Squeeze

In a period filled with terms like "biggest ever," it’s not surprising that non-traded BDC investors are racing for the exits. The market had already predicted that declining rates would reduce returns, prompting retail investors to withdraw from some private credit investments.

But credit risk has made this trend even more urgent. According to Fitch Ratings, the US private credit default rate rose to 5.8% in the 12 months through January—the highest since it began tracking in August 2024.

Some analysts have gone further, attempting to estimate the potential impact of AI on software companies—a pessimistic outlook. Given private credit’s exposure, a team of UBS strategists led by Matthew Mish said in a worst-case scenario, private loan default rates could hit 15%. However, Ares Management CEO Michael Arougheti strongly rebutted this forecast, calling it "frankly irresponsible."

For advocates of redemption limits, credit losses—whether realized or potential—are one of the strongest arguments that other BDCs should follow the HPS fund’s lead. They believe this mechanism’s purpose is to prevent a vicious cycle—funds forced to sell assets at low prices to meet redemptions, hurting remaining investors and triggering further redemptions.

In 2022, Blackstone implemented redemption limits for a similarly structured real estate fund under pressure, and subsequently won a $4 billion investment commitment from University of California, restoring market confidence.

Imposing redemption limits also offers funds breathing space to continue operating as designed—using new capital to make new loans, rather than paying departing investors. Managers can put fresh money to work in more attractive investments rather than using it for redemptions.

Vivek Bantwal, global co-head of private credit at Goldman Sachs Asset Management, said: "Fund redemption limits are a feature, not a bug." He spoke from the same stage as BCRED co-CEO Brad Marshall, who reiterated the same view a day after the fund disclosed record redemptions.

But for investors, in a market discussing the possibility of 18 more months of pain for private credit, these arguments for redemption restrictions may carry little weight—especially if financial advisors failed to explain what such limits mean during periods of credit stress.

Still, boutique investment bank Robert A Stanger & Co., which has long tracked the BDC sector, regards BlackRock’s move as a watershed. Managing director Michael Covello said, "Now that HPS has done it, we expect others to follow."

At least, for veteran Wall Street analysts, there is little sympathy for retail panic in the private credit market. Evercore ISI analysts said last week: "Semi-liquid funds were marketed and designed to provide limited liquidity during times of stress. The important thing now is to re-educate investors to understand the nature of private assets."