Blackstone BDC redemption surge signals a warning for other funds

Clients are continuing to look to exit semi-liquid private credit funds and business development companies, and last week’s surge in customers getting in line to sell back their shares to the $79 billion Blackstone Private Credit Fund, also known as BCRED, indicates that other similar funds will soon report a long line of customers wanting to sell or redeem their shares.

BCRED on Thursday reported that, for the quarter ending June 30, clients’ repurchase requests are approximately 10% of shares outstanding.

Not all clients will get their money back. The fund will not buy back all those shares, according to a filing with the Securities and Exchange Commission. Rather, as the fund is designed, it will repurchase requests representing 5% of shares outstanding, according to the filing. The remaining BCRED investors will have to get in line and wait to redeem their shares.

BCRED is a nontraded BDC, meaning its shares are not listed on an exchange. The result is limited liquidity for investors. Such alternative investments are designed to boost yields in clients’ portfolios but illiquidity can pose a risk.

“BCRED is the first of these funds to announce clients’ redemptions for the quarter, and other are coming at the end of the month, including Blue Owl funds,” said John Cox, CEO of Cox Capital Partners. “BCRED is a huge fund, so thousands of people must have been trying to sell their shares.”

"“BCRED’s structure is a fundamental feature, with investors exchanging some liquidity at times for long-term outperformance," a Blackstone spokesperson wrote in an email. "Class I shares have delivered a 9.3% annualized total return since inception, an over 50% premium to leveraged loans." 

A series of missteps last fall by prominent BDC manager Blue Owl Capital, which trades with the ticker OWL, triggered clients’ and their financial advisors’ concerns for the private credit funds, which have seen a spectacular sales boom in the past half-decade.

Traded and nontraded BDCs are funds that act like mini-banks and finance the loans of mid-sized private companies. They have exploded in popularity since the 2008 credit crisis, with the restriction placed on banks opening up the market.

But investors have woken up to worries about BDCs' exposure to loans to private software companies, which are under pressure because of the potential for artificial intelligence to wipe them off the map.

BCRED’s 5% redemption rate in the second quarter came after the fund saw client redemption requests jump to a then-record of 7.9%, or about $3.8 billion, in the first quarter. But Blackstone fulfilled 100% of those requests.

It has been tough sledding of late for the retail alternative investment industry.

The dramatic fall off in sales of private credit and loan funds, including nontraded BDCs like BCRED, reached a critical point, according to an  analysis in May by Robert A. Stanger & Co., with clients redeeming or selling back their shares to nontraded BDC funds outpacing new sales in the first three months of the year by $2 billion.

This was a fresh if painful point in the market for the asset class, which has only seen skyrocketing growth in the past decade, according to Stanger. It was the first quarter that clients’ redemption of shares of nontraded BDCs has outpaced sales of new shares to retail investors.