Private credit jitters ripple to fund with consumer loan holdings

A Stone Ridge Asset Management fund tinged with consumer loans from fintech platforms is the latest sign that investor unease in private credit is spilling into specialty lending strategies, including buy now, pay later debt.

Stone Ridge told investors last week it would meet only a small slice of the latest redemption wave from its Stone Ridge Alternative Lending Risk Premium Fund, known as LENDX.

According to an investor update cited by the Wall Street Journal, the manager is set to pay out just 11% of the cash investors requested, following an earlier offer to repurchase up to 7% of shares outstanding, with room to buy back an additional 2% if demand exceeded that cap.

The fund buys whole loans and securities backed by consumer and small-business loans originated by fintech lenders. Its portfolio includes buy now, pay later loans from Affirm, personal loans from LendingClub and Upstart, and financing extended to merchants that use platforms such as Block and Stripe. At the end of November, LENDX held about $2.4 billion in total assets and $1.6 billion in net assets.

Unlike some recently stressed private credit vehicles that leaned heavily on loans to software and other corporate borrowers seen as vulnerable to artificial intelligence disruption, LENDX is concentrated in consumer and small-business credit. The interval fund structure requires Stone Ridge to offer to repurchase at least 5% of outstanding shares each quarter, but the shares do not trade on an exchange, so investors must wait for periodic windows to exit.

Read more: Warning! Private credit has a valuation problem

The Stone Ridge move comes as other private credit managers face their own liquidity tests. Cliffwater is paying out roughly half of the redemption requests it received at the Cliffwater Corporate Lending Fund. For advisors who have steered clients into semi-liquid private credit products, the latest developments underscore the mismatch between underlying loan liquidity and the promise of periodic redemptions.

For now, the backdrop in BNPL itself looks more measured than the redemption headlines might suggest. A Consumer Financial Protection Bureau study of six large providers found that the average yearly dollar value of a BNPL loan increased to $848 in 2023 from $745 in 2022, a 14% jump, even as growth in overall usage slowed compared with earlier years.

“The volume of BNPL originations continues to grow, albeit at a slower pace than in previous years,” the study published in December said.

An economic brief published last month by the Federal Reserve Bank of Richmond, which drew from the CFPB study, show BNPL dollar originations by those six lenders rising from $25.5 billion in 2021 to $33.4 billion in 2022 and $43.9 billion in 2023, with growth settling into the low-30% range on an annual basis.

The Richmond Fed estimates total BNPL transaction value at about $70 billion in 2025, or roughly 1.1% of credit card spending, suggesting the product remains a small slice of US consumer credit by volume. It's even smaller relative to the global private credit market, which research by the Alternative Credit Council estimates at $3.5 trillion.

Read more: Private credit at a crossroads: Europe surges as US market shows strain

Credit performance has also been relatively stable. According to the CFPB data cited in the Richmond Fed brief, 1.83% of BNPL loans were charged off or deemed uncollectible in 2023, down from 2.63% in 2022, while the charge-off rate on credit card loans at US commercial banks was 4.19% in the fourth quarter of 2023.