News · BFSI
Redemption requests at major private credit funds are running well above quarterly caps, raising questions about the structural liquidity mismatch built into these products.
✦ AI SUMMARY 30-second read
- Morgan Stanley's North Haven Private Income Fund saw redemption requests of 11.4% in Q3, against a 5% quarterly cap.
- Requests at Blue Owl Capital's tech-focused OTIC fund reached nearly 39% of shares, nearly eight times the repurchase limit.
- Experts warn retail investors are poorly equipped for the mismatch between promised quarterly liquidity and illiquid underlying loans.
Why it matters: Structural tension between periodic liquidity promises and multi-year illiquid loan books is testing private credit funds at scale.
This summary was generated by AI. Editors may review and update it.
Private credit funds are facing a growing imbalance between the number of investors seeking to exit and the withdrawal limits these funds were designed to accommodate. Redemption requests at several flagship funds have risen to between 10% and 16% of shares in a single quarter, well above the standard 5% quarterly repurchase cap that most such funds enforce.
The pressure reflects mounting concern among investors over rising defaults, reduced deal activity and uncertainty about how managers price loans that do not trade on open markets. Each fund that gates withdrawals appears to deepen anxiety among remaining investors, prolonging the queue of those seeking to leave.
What the numbers show
At Morgan Stanley, investors in the North Haven Private Income Fund sought to redeem 11.4% of shares in the third quarter, barely changed from 11.6% the prior quarter. At Blackstone's flagship Blackstone Private Credit Fund, known as BCRED, requests reached roughly 10%. At Cliffwater's flagship fund, they hit about 16%. Each fund capped repurchases at 5%.
At Blue Owl Capital's tech-focused fund, OTIC, redemption requests have held at nearly 39% of shares, nearly eight times the cap, amid concerns that artificial intelligence could erode the software companies the fund lends to. Blue Owl has attributed the outflows to negative sentiment. Co-CEO Marc Lipschultz described it on the firm's April earnings call as a headline-driven, not fundamental-driven, redemption environment.
The liquidity mismatch
Federico Basile, founder and managing partner of Capital-Hill Securities, a Luxembourg securitisation issuer, said the quarterly cap reveals a fundamental truth about the asset class. "A quarterly cap on a portfolio of five-year private loans is not a liquidity feature. It is an acknowledgment that the asset has none," he said.
Lakshmi Ganapathi, founder of Unicus Research in Ridgefield, Connecticut, argued that retail investors are walking into a mismatch they are poorly equipped to handle. They are being sold quarterly exits on assets that do not trade, she said, with well-known brand names and marketing language carrying outsized influence over investment decisions.
Ganapathi also warned that the pressure is likely to build, saying that a redemption wave is expected to pick up speed in 2027.
Valuation and income concerns
A related concern centres on how illiquid corporate loans are priced. If a fund marks its loans too high, investors who exit first collect more than their proportionate share, leaving remaining investors to absorb the difference. Kimberly Flynn, president of XA Investments, a 1 billion dollar fund platform and alternative investment consultancy segment of Chicago-based XMS Capital Partners, said that while many registered funds use independent third-party valuation firms, rigor varies widely.
Flynn also flagged the growing use of payment-in-kind, or PIK, income, where borrowers pay interest with additional debt rather than cash. She described the growing amount of PIK in direct lending as a source of concern for companies that are not current pay, noting it has implications for valuation.
Tarek Omar, CEO and partner at Royce Stone Capital, a Melbourne-based private credit and investment firm, cautioned against treating PIK income and redemption pressure as interchangeable signals of loan quality. "The two things shouldn't be bundled together as proof that the loans are getting worse," he said, while acknowledging that if collateral deteriorates, a fund may have less capacity to meet withdrawals.
Regulation and what comes next
Ganapathi questioned whether existing regulation translates into effective enforcement, arguing that retail buyers may not be adequately informed of the risks involved and that banks lending to private credit funds have limited visibility into how risky those exposures are.
Omar framed the essential test for everyday investors in straightforward terms: anyone buying an income investment must decide how long they can leave their capital committed. The 5% quarterly repurchase cap, he noted, is shared across all investors in a fund, not an individual allowance. "Did I know that when I put the money in? That's the question," he said.
