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Wealthy individuals have sought to pull more than $10bn from some of the largest private credit funds in the first quarter, prompting investment managers to limit withdrawals and threatening to stall one of Wall Street’s most important sources of growth.
Debt funds managed by powerhouse firms including Blackstone, BlackRock, Cliffwater, Morgan Stanley, and Monroe Capital have agreed to honor about 70 per cent of the $10.1bn of redemption requests they have faced, according to FT calculations. That number is expected to rise over the next two weeks, as funds managed by Ares Management, Apollo Global, Blue Owl, Oaktree, and Goldman Sachs tally up how many of their investors are heading for the exits.
Some on Wall Street, such as former Pimco co-chief executive Mohamed El-Erian, have said the ructions are reminiscent of the early days of the 2008 financial crisis. But many private capital executives told the FT they were perplexed by what they felt was an indiscriminate sell-off that did not reflect the performance of their portfolios.
The funds that have already reported withdrawals manage investment portfolios worth about $166bn, a fraction of the roughly $1.5tn invested across direct lending funds. But these vehicles have been among the fastest-growing corners of the private investment industry, providing a building block for money managers as they set their sights on cracking the $9tn US retirement market.
The redemptions have reversed a five-year stretch in which nearly $200bn flowed into the debt funds of large private market groups, helping to spur a boom in their growth and profitability. This reversal has led investors to question whether private capital groups deserve their once-rich valuations relative to the broader market.
It has caused ferocious selling pressure on the stocks of firms such as Blackstone, KKR, Blue Owl, Ares, and Apollo, whose shares have plunged by 25 per cent or more this year, shedding more than $100bn in combined market value.
“The air has come out of the balloon and the whole industry has been under a lot of pressure,” says CT Fitzpatrick, chief executive of Vulcan Value Partners, a longtime shareholder in publicly traded private capital groups.
Firms such as Blackstone and Blue Owl do not hold loans on their own books that would expose them to large losses, and they carry minimal corporate debt. But their share prices have been volatile in recent years as investor perceptions of their future growth have swung wildly amid geopolitical and market upheaval. Now they face questions about the performance of retail funds that have underpinned their success while masking a broader pullback in investment from many pensions and endowments.
Blackstone’s $48bn Bcred debt fund has become its single largest source of fees, representing about 13 per cent of the $1.3tn-in-assets firm’s overall fee revenue. The fund pays Blackstone a 1.25 per cent annual management fee on investors’ assets and a 12.5 per cent performance fee over a 5 per cent minimum return. Such funds charge performance fees based on their marks and dividends, not when assets are actually sold. Bcred generated $1.2bn in fees for Blackstone last year.
Blue Owl’s $35bn private fund, known as OCIC, has been similarly vital to its growth. The fund last year paid out $447mn in management and incentive fees to Blue Owl. It is just one of a handful of semi-liquid private credit funds that the group manages. Analysts at Goldman Sachs estimate that Blue Owl is more exposed to these funds targeted at wealthy individuals than any of its publicly traded rivals, pegging 21 per cent of the firm’s annual fee-related revenues to the vehicles.
Such fees have taken on an increased prominence in recent years as private capital groups arranged their finances to better appeal to stock market investors by emphasizing their more predictable fee-based earnings, instead of larger episodic payouts from winning deals. It incentivized firms to quickly grow their assets, particularly in high-margin retail funds, though it came with the risk that those very investors could redeem their money during market upheavals.
“We know how the masses behave,” said Jack Shannon, analyst at Morningstar. “It’s fickle, they will chase performance. They will leave the moment they sense danger.”
Yet the money propelled private capital groups to new heights as their valuations soared to 30 or 40 times their fee-based earnings, giving them a significant premium to other financial services companies such as banks and insurers, as well as the broader market. Assets poured into retail private credit funds and similar products targeting corporate buyouts, property deals, and infrastructure investments. For many firms, particularly Blue Owl and Blackstone, such assets drove their growth.
Goldman Sachs analysts calculate that retail credit funds saw their assets increase from $34bn at the end of 2021 to $222bn at the end of last year. But that growth has gone in reverse this year. After a wave of redemptions underscored the risk that investors cannot always get their money back, Goldman now predicts such funds could shed $45bn to $70bn in assets over the next two years. Blackstone continues to attract new money from its private equity and property retail funds, softening the hit from Bcred’s redemptions.
Fitzpatrick, the investor at Vulcan Value, said his firm had sold some of its private capital holdings early last year after their valuations soared. But he believes companies such as Ares that derive a greater share of their fees from less flighty pensions and endowments had been indiscriminately sold off by investors.
“The whole industry has been hit with a pretty broad brush,” he said of the sell-off. “People are not differentiating between companies that have better business models and those with weaker business models.”
