Clients are continuing to seek exits from semi-liquid private credit funds and business development companies, and the latest surge in redemption requests at Blackstone's $79 billion BCRED suggests other similar funds may soon report long queues of investors wanting to sell shares.
BCRED reported Thursday that for the quarter ending June 30, client repurchase requests amounted to approximately 10% of shares outstanding. However, the fund will only repurchase 5% of shares outstanding, as per its design, according to an SEC filing. The remaining investors must wait in line for future redemptions.
BCRED is a nontraded BDC, meaning its shares are not listed on an exchange, resulting in limited liquidity. These alternative investments are designed to boost yields but carry illiquidity risk.
“BCRED is the first of these funds to announce clients’ redemptions for the quarter, and others 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.”
A Blackstone spokesperson noted that BCRED's structure is a fundamental feature, with investors exchanging some liquidity for long-term outperformance. Class I shares have delivered a 9.3% annualized total return since inception, a premium of over 50% to leveraged loans.
The redemption surge follows a series of missteps last fall by Blue Owl Capital (ticker: OWL), which triggered concerns among clients and financial advisors about private credit funds. These funds have seen a spectacular sales boom over the past half-decade.
Traded and nontraded BDCs act like mini-banks, financing loans to mid-sized private companies. They have exploded in popularity since the 2008 credit crisis, as bank restrictions opened the market. However, investors are now worried about BDCs' exposure to loans to private software companies, which face pressure from the potential impact of artificial intelligence.
BCRED's 5% redemption rate in Q2 follows a then-record 7.9% redemption request in Q1, or about $3.8 billion, which Blackstone fulfilled 100%. The retail alternative investment industry has faced tough sledding recently.
The dramatic falloff in sales of private credit and loan funds, including nontraded BDCs like BCRED, reached a critical point, according to a May analysis by Robert A. Stanger & Co. In the first three months of the year, client redemptions outpaced new sales by $2 billion, marking the first-ever quarterly net outflows for nontraded BDCs. For more on this trend, see Nontraded BDCs See First-Ever Quarterly Net Outflows as Redemptions Hit $6.9 Billion.
Regulators are also paying attention. SEC Enforcement Chief Woodcock recently warned private funds about fees, conflicts, and liquidity risks, as detailed in SEC Enforcement Chief Woodcock Warns Private Funds on Fees, Conflicts, and Liquidity Risks. Meanwhile, the broader market for alternative investments continues to evolve, with new products like Franklin Templeton's first CLO ETF tapping a $35 billion market surge, as reported in Franklin Templeton Launches First CLO ETF, Tapping $35B Market Surge.
