Private Credit’s Biggest BDCs Grappling With Investor Exodus

(Bloomberg) -- Investors who poured billions of dollars into private credit over the past half-decade are now rushing to yank their cash from vehicles holding direct loans, amid lower returns and fears over credit quality in the $1.7 trillion asset class.

From Ares Management Corp. to Blue Owl Capital Inc. and Blackstone Inc., the biggest lenders were hit with a spike in requests from investors to withdraw money from their large non-traded business development companies in the three months through December. 

Investors in BDCs holding more than $1 billion asked to pull a total of more than $2.9 billion in the fourth quarter, up 200% from the prior period, according to a report from Robert A Stanger & Co., a boutique investment bank that tracks the industry closely.

Even amid the withdrawal requests, many of these funds are drawing more investor cash than they are losing. So far, fund managers have agreed to honor all redemption requests.

The climb in withdrawals shows how sentiment has soured toward private credit in recent months. Fears have set in over lower returns, rising signs of stress and increased scrutiny from regulators and policymakers.

“The current environment represents one of the first real tests for the largely non-institutional client base of many of these funds since Covid,” said Alfonso Rodriguez, an associate director of alternative investment research at EP Wealth. 

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Investors in Blackstone Inc.’s BCRED, the biggest vehicle in the space, asked to pull about $2.1 billion from the fund in the quarter, worth about 4.5% of net assets, according to a report from Goldman Sachs Group Inc. 

In an unprecedented move, Blue Owl Technology Income Corp. — known as OTIC — allowed investors to withdraw as much as 17% of its net assets, worth about $685 million. Blue Owl’s largest non-traded BDC, Blue Owl Credit Income Corp., has had redemption requests more in line with the industry average of 5%, Bloomberg previously reported.

Redemption requests for Ares’ non-traded BDC reached more than 5% of the vehicle’s net assets in the fourth quarter. One large withdrawal request made before September contributed to the surge, Goldman Sachs analysts wrote in the report. 

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Historically, redemptions have hovered at 2% of a fund’s net assets, according to Goldman Sachs. 

A representative for Ares declined to comment. Its ASIF vehicle has had an annualized total return of 11% through Nov. 30 for its Class I shares since it began, according to a December filing. The document showed positive net inflows for the quarter.

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A representative for Blue Owl said OTIC’s performance remains strong with roughly 11% returns for its Class I shares since its inception. 

“Our portfolio is well positioned and with leverage below target, we maintain substantial liquidity for future investments and obligations,” the representative said.  

A representative for Blackstone said BCRED has delivered a 10% annualized total return since its creation, with “strong, positive” net flows for the quarter. “Investors continue to recognize the premium private credit can offer vs. public fixed income,” the representative said. 

Minimal Losses

Blue Owl, Ares and Blackstone all reported record fundraising for private wealth products last year. Most of these non-traded vehicles have also reported minimal losses. And a Stanger report previously noted that the non-traded BDCs have collected more in the ten months through October than they did for the whole of 2024.

But net assets sitting in private BDCs have declined over the past five quarters, with those in funds managing more than $750 million dropping 0.4% in the third quarter, according to Raymond James.

“Covenants are getting lighter and concerns around underwriting quality are starting to increase,” Stephen Kolano, chief investment officer at Integrated Partners, said in an interview. “With this backdrop, investors are looking to get liquidity and rebalance and reallocate and — or — reduce exposure.” 

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Such requests are expected to remain elevated across non-traded BDCs in the first quarter, but calm down by mid-year, according to Goldman Sachs’ analysts. 

If redemption requests continue at around 5%, non-traded BDCs would report about $45 billion of net outflows a year. However, managers are expected to be able to handle redemptions even at that rate in the long-term, given they hold $500 billion of total available capital, according to the Goldman Sachs report. 

Growing Unease

Investors flocked to non-traded BDCs, drawn by the prospect of avoiding volatility in the public BDC market. Unlike those funds, which are traded like stocks, non-traded funds offer investors the opportunity to redeem shares on a quarterly basis. Those redemptions can help gauge sentiment around private credit.

There’s unease about a rise in “shadow defaults” in private credit, where investors are more willing to extend terms and rework deals, compared with the public markets, when those may have defaulted, Kolano said.

Investors are also considering reallocating capital from corporate direct lending to the largest direct lending funds, according to Dave Donahoo, head of US wealth management alternatives at Franklin Templeton.

In November, Sixth Street Partners Co-Chief Investment Officer Josh Easterly said returns for private credit would come down as the Federal Reserve continues its rate-cutting cycle and competition from banks leads firms to tighten spreads. He expected flows into non-traded BDCs to slow as investors look for discounts on publicly traded vehicles, according to his investor letter. 

On the heels of years of record fundraising, firms and their funds are also under pressure to find deals to spend capital on. That proved to be a challenge last year, thanks to a lack of mergers and acquisitions.

“In some cases, these funds have raised so much capital that they don’t have enough loans to deploy it into, resulting in 20% to 40% of the portfolio being allocated to bank-syndicated loans,” EP Wealth’s Rodriguez said. “When investors are paying private-market fees for a large public-asset allocation, that becomes a problem.”