Another troubling week for investors in private credit, BDCs

Investors continued to pull money from large funds that invest in private credit this week as others questioned the accuracy of the valuation of loans owned by the funds.

As InvestmentNews reported last month, financial advisors’ sales of business development companies, high-yield funds that invest in private credit, have tanked in the past couple of months as the private loan market faces questions about lending to software companies and high-profile bankruptcies in 2025. 

Some investors and their financial advisors are now seeking to exit high-yield, illiquid or nontraded BDCs through a process called redemption, or selling shares back to the fund company. Many nontraded BDCs cap their redemptions at 5% of the outstanding shares pAner quarter, a cause for concern for some wanting to sell their shares as soon as possible.

For example, Cliffwater on Wednesday told clients that investors in its largest fund asked to cash out 14% of their money this quarter.

Morgan Stanley this week said it was limiting clients’ redemptions at one of its private credit funds after investors sought to withdraw almost 11% of outstanding shares.

The $33 billion Cliffwater 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, according to the Wall Street Journal and other reports.

Cliffwater sold its funds primarily to individual investors, a playbook that larger competitors like Apollo Global Management, BlackRock, Blackstone and Blue Owl adopted, according to the Journal, 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," it reported.

Meanwhile, some investors are questioning the value of the loans some private-credit funds and BDCs own.

Glendon Capital Management has said that private credit lenders such as Blue Owl “are obscuring weaknesses ​in their portfolios and a sharp correction in debt markets ‌is approaching soon,” according to Reuters, citing a Financial Times report from Thursday.

“Investment firm Glendon said that private credit funds managed by Blue Owl and many of its ​rivals had ‘misrepresented' loss rates in their portfolios and were sitting ​on ‘larger losses than reported,’” according to Reuters.

Reuters said it could not immediately verify the Financial Times report and that Blue Owl did not immediately respond to a request for comment outside regular business hours.