Investor Confidence Erodes in Private Credit Funds
Over $7 billion was withdrawn from top private credit funds at the end of last year, indicating a growing reluctance among major investors to continue waiting. The recent bankruptcies of First Brands and Tricolor, both heavily leveraged with bank-arranged loans and asset-backed debt, have heightened concerns across the market.
Funds managed by prominent firms including Apollo, Ares, Barings, Blackstone, Blue Owl, Cliffwater, Oaktree, and BlackRock’s HPS have experienced substantial redemptions, according to data from SEC filings. These withdrawals are reportedly around 5% of the net value of affected funds after debt, with expectations that further reports will reveal even higher figures in the coming weeks.
The private credit market, valued at $2.3 trillion, is susceptible to significant downturns if investor confidence continues to decline. Such a scenario could potentially trigger a notable impact on publicly traded stocks.
Market indices reflected a cautious sentiment on Friday. The S&P 500 closed down by 0.06% at 6,940.01, the Nasdaq Composite saw a slight decrease of 0.06% to settle at 23,515.39, and the Dow Jones Industrial Average fell by 0.17% to end at 49,359.33.
Jamie Dimon, CEO of JPMorgan, offered a stark warning, stating, "When you see one cockroach, there are probably more."
The slowdown in demand was already evident, partly due to the Federal Reserve signaling upcoming interest rate cuts. Lower interest rates typically translate to reduced returns, particularly for funds holding floating-rate loans. Some funds responded by slashing dividends, which further unsettled investors.
Non-traded Business Development Companies (BDCs) and interval funds, which serve as primary access points for retail and high-net-worth investors into private credit, have borne the brunt of this pressure. While managers generally have the ability to cap quarterly withdrawals at 5%, many funds have permitted investors to redeem amounts exceeding this threshold.
President Trump's Interest Rate Cap Proposal Adds to Market Fears
Amidst the ongoing investor flight from private credit, President Trump's proposal for a 10% interest rate cap on credit cards has introduced a new layer of concern. The Electronic Payments Coalition has warned that such a cap could lead to 82% to 88% of cardholders losing their cards or facing significant credit limit reductions, impacting millions of Americans.
Individuals with credit scores below 740 are projected to be the most severely affected. The EPC estimates that between 175 and 190 million people in this category could either lose their credit cards or experience substantial limit cuts.
Jeremy Barnum, CFO at JPMorgan, communicated to investors that this policy change would severely restrict credit access. He stated, "People will lose access to credit, like on a very, very extensive and broad basis, especially the people who need it."
Barnum further elaborated on the potential repercussions, noting, "This could have a severely negative consequence for consumers and, frankly, probably also a negative consequence for the economy as a whole." He also acknowledged the impact on the banking sector, adding, "We wouldn’t be in it if it weren’t a good business for us."
Earlier, Cliffwater had expressed confidence in their operational capabilities, stating, "not worried about our ability to perform, knowing that we have a lot of liquidity behind us and we think quarter on quarter things will get better."
The credit market is currently facing multifaceted challenges, including the collapse of companies, escalating investor redemptions, anticipated interest rate cuts, and the contentious debate over credit card interest rate caps. The future trajectory of the market remains uncertain, with Wall Street closely observing the ongoing investor outflows.