A significant shift is underway in the private credit market, a domain that saw a remarkable surge in recent years. From early summer 2023 through January 2025, private equity stocks experienced what some observers characterize as an unprecedented ascent. Firms like Blackstone, Ares, Apollo, and Blue Owl delivered impressive total returns, with KKR leading the pack at 103.4% over that eighteen-month period. This era of substantial gains, however, abruptly gave way to an historic selloff beginning last September, wiping out over $265 billion in market capitalization. Apollo saw a 41% decline from its peak, Blackstone fell 46%, while Ares and KKR each dropped 48%. Blue Owl experienced an even steeper descent, losing two-thirds of its value. This sudden reversal has left some of these giants, including Blackstone and Blue Owl, trading below their late 2021 levels.
The core of the issue extends beyond the challenges of overpaying for buyout targets during a period of ultra-low interest rates, a problem that has forced private equity firms to hold portfolio companies longer and constrained exit profits. Historically, the tremendous growth in private debt had more than compensated for any slowdown in their traditional buyout franchise, fueling the extraordinary performance of their stocks. Now, a new anxiety has gripped the market, particularly concerning loans to software companies perceived to be vulnerable to advancements in artificial intelligence. This fear has prompted a wave of redemption requests, especially from newer retail investors who entered the market drawn by high yields. Matt Swain, co-head of Equity Capital Solutions at Houlihan Lokey, described the situation as resembling “a run on a bank,” highlighting the unexpected impatience of these retail participants compared to the traditional, long-term institutional investors.
These newer retail investors, often seeking higher yields than traditional avenues, have proven to be less tolerant of illiquidity. Their collective demand for redemptions has caused considerable distress within some of the private equity world’s largest and most profitable funds. The scale of these requests has, in some instances, led firms to “shut the gates,” limiting withdrawals and, ironically, intensifying the desire among investors to exit. This phenomenon underscores a key difference in investor behavior between sophisticated institutions, accustomed to long lock-up periods, and a segment of the retail market seeking faster liquidity.
A significant factor contributing to the current predicament is the composition of these “semi-liquid” private credit funds. These vehicles, often structured as Business Development Companies (BDCs) that do not trade on public exchanges, allow investors to request redemptions up to a certain percentage of their net asset value, typically 5%, per quarter. This design, intended to offer some liquidity while maintaining long-term investment horizons, became immensely popular, with assets under management surging from $200 billion at the start of 2022 to $500 billion by the third quarter of last year. Firms like Blue Owl attracted approximately 40% of their over $300 billion in assets under management from individual investors, aiming to “democratize” access to products previously reserved for large institutions.
The immediate catalyst for the widespread unease can be traced to September of last year, following the bankruptcies of subprime auto lender Tricolor and car-part manufacturer First Brands, both heavily leveraged with cheap debt. While these specific debts were held by banks, not private equity firms, the broader fear that AI could disrupt significant portions of the software industry initiated a cascade of redemption demands from individual investors. Blue Owl, a major player in the retail segment, restricted withdrawals in November and later bought back 15% of outstanding shares in one fund to meet demands, while ending regular quarterly liquidity payments in another. Blackstone’s Private Credit Fund (BCRED) faced requests to withdraw $3.8 billion, or 7.9% of its assets. The firm responded by committing $400 million of its own capital and executive funds to satisfy these requests. The contagion spread, with other major fund managers, including BlackRock and Morgan Stanley, also imposing withdrawal restrictions. In Canada, about 40% of the $30 billion invested in private real estate funds is now gated.
Adding to the complexity, some funds reportedly deviated from the common practice of holding about 10% of assets in cash for redemptions. Instead, they allocated these “reserves” to syndicated debt with higher yields, including software bonds. When the market shifted and redemptions surged, selling these devalued bonds to raise cash resulted in significant losses, further tightening liquidity. Despite these challenges, Jon Gray, President and CEO of Blackstone, has argued that withdrawal caps are not a flaw but a fundamental feature of these products, allowing for higher returns in exchange for reduced liquidity—a trade-off institutional investors have long accepted. He emphasizes the diversification of these funds and the absence of widespread default risk among portfolio companies.
Against this backdrop, a potential solution is emerging through “secondary funds” and “Continuation Vehicles” (CVs). These entities traditionally acquire stakes from limited partners seeking early exits. While historically focused on equity, they are increasingly active in credit. Continuation Vehicles, in particular, allow a private equity firm to retain a successful company in its portfolio by bringing in new investors to replace those who wish to cash out. This mechanism could offer a crucial pathway for retail investors to exit without forcing funds into fire sales of assets, which would harm remaining shareholders. Matt Swain of Houlihan Lokey believes CVs, often backed by sophisticated family offices, endowments, and foundations, could stabilize the market by providing liquidity and absorbing shares at a discount. The market for secondaries is growing, though its capacity relative to the $1.8 trillion private credit market remains a point of discussion. However, the opportunistic nature of CV investors, who are in for the long haul and seek value in distressed situations, suggests a potential lifeline for the private credit sector.
