Yet another private credit firm is facing investors who want to get their money out, and yet again the private credit firm is saying no — or at least, kind of no.
Blackstone’s private credit fund is capping investor withdrawals at 5%. That’s after those investors overall requested to take out at 10% of their funds. Other private equity firms are doing the same, including Partners Group and Cliffwater.
After the financial crisis of the late 2000s, interest rates were really low for a long time. So investors started looking around for good places to put their wealth.
“There is generally a big inflow of money into alternative space,” said Victoria Ivashina, a professor at Harvard Business School.
A lot of investors realized they could do what banks do, and lend money to new kinds of businesses that banks are wary of.
“Traditional debt markets were not providing this form of financing,” Ivashina said.
Non-banking institutions or people doing bank-like things, specifically lending, is called private credit. And it took off.
“It was exponential growth since after the financial crisis,” Ivashina said.
Private credit became even more popular when interest rates started to rise after the height of the COVID-19 pandemic. Big companies didn’t like that, and they didn’t like how inflexible traditional banks were about loans, so they started turning to private credit.
“It reflects a broader trend of the decline of traditional banking,” said Tomasz Piskorski, a professor at Columbia Business School.
Private credit got even bigger when cloud computing and AI and data centers joined the party, and investors went absolutely nuts for all that.
“The size of private credit more than tripled over the last few years,” Piskorski said.
So why are we now hearing about investors wanting to take their money out? Well, with time, Ivashina said the warts on some investments are beginning to show.
“As this asset class kind of expanded, we didn’t see many defaults,” she said. “When you start something, the problems are not imminent.”
And sure enough, as time went on, there were defaults. One of private credit’s favorite darlings — software services — got a big scare that AI might undermine it.
“That’s where some of the pressures were concentrated,” Ivashina said.
Some investors got queasy and wanted to take their chips home early, and some private credit firms have let them do it — up to a point.
But the vast majority of private credit firms do not allow that. And the vast majority of investors — especially the institutional, mega investors — don’t want out just yet anyway.