This week’s slump in asset-manager stocks was driven by private-credit fears. Here’s what’s worrying investors.

“It’s not a liquid market,” he said.

That poses a potential risk for investors, as the asset managers of BDCs may need to sell loans they hold in their portfolios to meet sudden redemption requests, Chang explained. And when loans become difficult to offload, managers may need to sell them at a discount or decide to halt withdrawals, a process known as gating. BDCs may fall under pressure as a result, putting investor capital at risk.

Some individual investors may now be waking up to the risks associated with packaging private loans in publicly traded vehicles, something which is a “liquidity mismatch,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, in a phone interview.

The recent slump in exchange-traded funds that provide exposure to BDCs reflect worries over cracks in the industry.

Shares of the VanEck BDC Income ETF BIZD — whose top three holdings as recently as Feb. 19 were Ares Capital Corp. ARCC, Blue Owl Capital Corp. OBDC and Blackstone Secured Lending Fund BXSL — ended Friday with a 1.9% weekly loss. The ETF has tumbled more than 25% over the past 12 months, according to FactSet data.

The VanEck BDC Income ETF’s holdings also include FS KKR Capital Corp. FSK, a BDC that’s a partnership between Future Standard and KKR.

While some of the large alternative asset managers whose shares sold off this past week are involved in publicly traded business development companies, Apollo’s BDC is not listed on an exchange. Also, while most BDCs target middle-market lending, the Apollo Debt Solutions BDC predominately focuses on larger deals, according to the asset manager’s website.

“Private credit has grown so much,” noted Chang.

Private-equity giants such as Blackstone, Apollo and KKR have helped fuel that growth by building out their private-credit businesses. Many private-equity deals are funded with private credit.

As large asset managers were swept up in private-debt fears, Apollo Global’s shares slumped more than 4% last week. Blackstone dropped a steeper 6.6% on the week, while Ares Management had a weekly loss of 8%, according to FactSet data.

There are various ways for individual investors to find exposure to private credit. The fund at the center of private-credit redemption fears this past week, Blue Owl Capital Corp. II., is not a publicly traded BDC.

“We are not halting investor liquidity in OBDC II,” a Blue Owl spokesperson said in an emailed statement to MarketWatch. “We are accelerating the return of capital.”

The firm’s recent asset sale will “return 30% of OBDC II investors’ capital at book value to shareholders equally on a pro rata basis,” according to the Blue Owl statement. “Instead of resuming a 5%-a-quarter tender, where only tendering investors get a small portion of their capital back, we are returning six times as much capital and returning it to all shareholders over the next 45 days.”

U.S. Treasury Secretary Scott Bessent addressed the growth of private-credit lending outside the banking system over the past decade while speaking at the Dallas Economic Club on Friday — noting that he is concerned with watching how the industry gets involved with the regulated financial system.

“Our job is to make sure that the regulated system is not affected by private credit,” he said at the event, after pointing to the subprime-mortgage crisis that triggered the global financial crisis almost 20 years ago.

“I hope that they’ve been prudent in their loan portfolios,” Bessent said. “We have the ability to peel back the curtain,” he added. “When you get a call [that] the secretary of the Treasury wants to come and see you, you return the call.”

In the meantime, private-credit managers might find some support from the fact that the U.S. economy has been expanding, even if its pace of growth slowed more than expected during the fourth quarter.

“Our read is that, to have a real credit crisis, you probably need a recession,” said Chang, adding that defaults tend to be higher in a recessionary environment.

Still, AI bubble and disruption fears in the U.S. stock market have collided with private credit, according to Anthony Saglimbene, chief market strategist at Ameriprise Financial. “There’s less visibility,” and so less understanding, of the deals done in private credit and private equity, he said in an interview.

“I think you’re starting to see investors become so concerned that redemptions for some of these strategies” have started to pick up, Saglimbene said. But, he added, private credit doesn’t seem like a “systemic problem.”