Private lending is facing a major challenge of "redemption wave", and the giants may need to "dig into their own pockets" to stabilize the morale.

Blackstone, Blue Jay, Ares Management, KKR and other private credit giants are currently facing a severe test. Over the past decade, they have aggressively taken over the leveraged loan market, creating Business Development Companies (BDCs) to raise a large amount of capital from individual investors to support their expansion. Now, with increasing concerns about high-risk debt, these retail investors are withdrawing. If the managers can step in at this time, it may help curb the panic; otherwise, hesitation will only add fuel to the fire. According to data from Solve statistics, the assets under management of BDCs have reached $500 billion. These tax-advantaged shell companies provide direct lenders with an unfixed pool of funds, with two main forms: one is listed BDCs, such as the $31 billion Ares Capital Corporation, where investors can freely buy and sell at market-determined prices; the other is non-traded BDCs, such as the $82 billion Blackstone BCRED Fund, which allows high net worth clients to redeem based on the fund's published net asset value, with a quarterly limit usually not exceeding 5%. Currently, both models are in distress. Morningstar data shows that the median market value of listed BDCs has fallen to 73% of their claimed net asset value. Meanwhile, there has been a flood of redemptions in non-traded funds surpassing the nominal limit. Blue Jay Capital has agreed to implement a 15% asset redemption on another fund after facing obstacles in liquidating an old fund. Giant BCRED reported on Monday that redemption requests have accounted for 7.9% of its shares, while other rival funds have generally exceeded the 5% regular limit recently. The initial panic in the market originated from the software industry - more precisely, the market's concerns that artificial intelligence may replace a large number of existing borrowers' products. This is no small matter for private credit: Barclays Bank estimates that about 20% of BDCs' average risk exposure is concentrated in the software industry. Since these companies are mostly light asset companies, if they go bankrupt in the future, the lenders may face the risk of negligible collateral value. Therefore, evaluating the potential losses from defaults is crucial. Listed BDCs usually use leverage to magnify their firepower, raising slightly more than $1 in debt for every $1 raised from individual investors. Analysis by Oppenheimer shows that in a scenario of pressure on senior secured loans, if the default rate reaches 10% and the recovery rate drops to 50%, a $1 billion fund would lose $50 million in principal. Calculated with the normal leverage ratio, the loss would be doubled, equivalent to eroding 10% of the fund's investors' net asset value. Deeper concerns go far beyond the software industry, rooted in the extreme optimism of the post-pandemic trading frenzy. Private credit defaults recorded by Fitch Ratings primarily impact healthcare providers and consumer goods companies. As of December last year, FS KKR Capital Corporation, a listed BDC with $13 billion in investments, recently disclosed that some borrowers in insurance claims management, veterinary services, and dental fields have stopped payments. Blackstone's TCP Capital Corporation is also facing difficulties due to loans provided to an acquisition for Amazon sellers. Lincoln Financial data shows that although the technical default rate for private credit by the end of 2025 was only 3.2%, the proportion of loans paid in kind (i.e., no longer paying cash interest) has skyrocketed to 6.4%. In this context, the managers of non-traded BDCs face a particularly challenging task: convincing investors to continue holding shares based on the funds' reported net asset value, even though portfolios with similar holdings are experiencing significant discounts in the public market. It is not surprising that individual investors, who typically have a preference for liquidity, are panicked. How these funds navigate the current volatility is a key test. Non-traded BDCs must maintain sufficient liquidity to address redemptions. Blackstone's BCRED fund had $8 billion in available funds at the end of last year, even if redemption levels remain at their recent exceptional highs, this amount of funds will be able to absorb about three-quarters of redemption requests. Another major challenge is how to refinance the leverage funding that is due, i.e., the debt incurred by the fund itself. There are three main refinancing channels: revolving loans from banks, Collateralized Loan Obligations (CLOs) from syndicated loans, and the bond market. The difficulty lies in coordinating these operations. Banks require BDCs to pledge portfolio assets as collateral for the refinancing, and if there are write-downs in the underlying loan portfolios, this refinancing channel will face obstacles. At the same time, issuing unsecured bonds is not an easy task. Fitch Ratings data from February shows that BDCs will need to refinance $12.7 billion in maturing debt this year. It was reported that Blackstone's listed collateral loan fund (BXSL) recently issued new bonds at a rate 50 basis points higher than the previous one. This means that pressured funds may face even more stringent refinancing premiums. FS KKR's bonds due in 2031 had their yields rise by a full percentage point in 2026. In this context, Collateralized Loan Obligations (CLOs) are considered the most hopeful financing option. Pricing mechanisms are crucial. BDCs essentially engage in the interest spread business, with profits depending on the difference between their financing costs and the external loan yield. If one side rises while the other fails to rise simultaneously, the profit margin will inevitably be squeezed. Of course, there is also a more aggressive way to realize value: selling part of the loan portfolio, as Blue Jay Capital and Neuberger Berman have done. However, regulatory requirements make it difficult for managers to sell assets to other funds they manage. In addition, underlying borrowers (often controlled by acquisition tycoons) often have a say in such transactions. Few in the industry see this as a large-scale solution to the crisis. Therefore, ultimately, managers may need to inject new capital from their own pockets. This week, senior executives at Blackstone and the company itself made small investments in the BCRED fund, which may serve as a precedent. After all, despite the market's discussion of various difficulties, software company revenues are still growing, and BDC default rates are relatively low. Looking at historical experience, listed funds have even experienced deeper discounts and then rebounded strongly. The private credit giants, who often dismiss skeptics, are now presented with a good opportunity to buy back their loan assets at a discount. Some institutions have announced stock repurchase plans or expansion of existing sizes. For example, Blue Jay Capital has increased the buyback limit for its listed fund from $2 billion to $3 billion. Anyone who refuses to follow suit will undoubtedly send a weak signal to the market. Liquidity constraints may be a major obstacle, but global top asset management companies such as Blackstone, BlackRock, and KKR still have hundreds of billions of dollars in callable credit "gunpowder." If they can demonstrate this strength, such as arranging a large unsecured bond issue with blue-chip institutional investors, it may help break the vicious cycle of valuation decline. Even stepping back, this can be seen as a practical response to the industry's years of complacency.