r/investing Mar 14, 01:21 AM
An Exodus of Money Endangers Wall Street’s Private-Credit Craze The private-credit engine that powered massive growth on Wall Street is sputtering, with investors trying to pull money out of big funds, forcing firms into uncomfortable decisions and endangering their future profits.
The latest example came Wednesday when Cliffwater told clients that investors in its largest fund asked to cash out 14% of their money this quarter. The $33 billion fund will pay out about 50% of the redemption requests, meaning that the other half will need to wait at least another quarter to exit.
Cliffwater sold its funds primarily to individual investors, a playbook that larger competitors like Apollo Global Management, BlackRock, Blackstone and Blue Owl adopted, making them all increasingly dependent on “retail” money for growth. They harbored hopes of getting an even bigger slice of individuals’ money, pushing to get access to 401(k)s.
The strategy started backfiring unexpectedly in recent months. Some bad loans from both private lenders and banks raised questions about other potential losses. As a herd mentality spread, investors raced to get out the door.
At the same time, the investment firms’ stocks are tumbling, with Blue Owl now off more than 40% this year. Banks including JPMorgan Chase are reassessing the risk of their own exposure to the industry.
Though the firms can limit how much gets out each quarter, meaning dramatic collapses are unlikely, the flight of money could stay elevated in coming quarters, analysts said. They point to a similar slow bleed from real-estate funds in 2022 that built up over months and took years to recover from.
“Retail capital is going to be a lot more cautious,” said Leyla Kunimoto, an individual investor in private funds and author of a newsletter about the industry. “In the short-term there is not going to be one financial adviser allocating money to them.”
Executives in the private-credit world say there is overreaction to a few bad investments, and that their industry is healthy. The bulk of the corporate loans the funds invest in are performing well, unlike the commercial mortgages in real-estate funds, which sank in value when interest rates jumped four years ago.
Cliffwater’s fund has returned 0.74% this year after fees and returned nearly 9% last year with minimal losses, it told investors. It said the higher-than-usual redemptions are the result of unfounded media hysteria.
Redemptions aren’t the only threat. The flow of new investments into the funds is also slowing, adding pressure to stocks as analysts cut forecasts for future fee earnings.
There are also signs that the turmoil in private credit funds is impacting other parts of the debt markets.
One of the few investments the funds own that they can easily sell in times of trouble are bonds of collateralized loan obligations, or CLOs, which are backed by bundles of corporate loans. The higher-yielding CLO bonds that private-credit funds primarily hold lost 4.1% in February, a sharp reversal from gains of 1% in J