Private Credit Cash Crunch Forces Tap Into Americans' Retirement Funds

Amid growing concerns over distressed private credit on Wall Street, the Donald Trump administration has opened the door for retirement plans to invest in the sector. The move amounts to a desperate measure as redemption requests from individual investors in private credit funds snowball into an uncontrollable cash squeeze. It is also the product of aggressive lobbying by Wall Street's largest private fund managers. However, many observers question whether retirement funds — including 401(k) defined-contribution plans that prioritize stability — will actually help stabilize the private credit market. Others point out that while private credit fund returns are deteriorating sharply due to portfolio company bankruptcies and artificial intelligence displacing entire industries, private credit still accounts for a small share of total private assets and is unlikely to shake Wall Street's financial system itself. **Private Credit Hit by Losses and Redemption Flood; Iran War Pushes Up Borrowing Costs** The Financial Times reported on March 21 that Blackstone's unlisted private credit fund BCRED posted a 0.4% loss in February. It was the first time BCRED recorded a negative monthly return since September 2022, when the Federal Reserve was rapidly raising interest rates. The underperformance of Medallia, a customer experience management software company in its loan portfolio, was a particular drag on results. In a recent letter to investors, Blackstone marked down its Medallia loan from 94 cents on the dollar at the end of 2024 to 78 cents at year-end — a 16% decline in asset value within a year. BCRED drew attention earlier this month when it honored redemption requests equivalent to 7.9% of its assets. Total investor redemption requests amounted to $3.8 billion (approximately 5.7 trillion won). BCRED manages $48 billion (approximately 72 trillion won) in assets and accounts for 13% of Blackstone's total fee revenue. The FT noted that "the collapse of BCRED, which had maintained positive returns for more than three years, signals the emergence of structural cracks in the $2 trillion (approximately 3,000 trillion won) global private credit market," adding that "advances in AI have raised questions about the long-term viability of enterprise software companies, and redemption demands from wealthy investors have surged." Overly complex fund disclosures have also been flagged as a problem. The Wall Street Journal reported on the 21st that the impenetrably dense disclosure documents of individual funds are fueling investor flight. Specifically, the WSJ noted that Cliffwater, an alternative investment specialist, listed more than 3,600 portfolio company names in its corporate lending fund's latest quarterly report in a nearly illegible manner. The fund further confused investors by repeatedly stating it would liquidate its holdings in the Ares private credit fund on June 30 of last year, then suddenly reporting the position still existed — with no explanation for why the Ares fund was not liquidated. Cliffwater even noted the Ares fund's value had continued to increase every quarter. Earlier, Cliffwater's corporate lending fund received redemption requests equivalent to 14% of net asset value in the first quarter and agreed to return only 7%. Bloomberg reported the same day that the surge in oil prices triggered by the war between the U.S.-Israel alliance and Iran is also raising borrowing costs for companies in private credit portfolios. Inflation itself burdens corporate operations, and the resulting rise in lending rates further impedes cash flow. As overall corporate stress increased, investment-grade corporate bond spreads — the gap between government and corporate bond yields — widened from a year-to-date low of 0.71 percentage points on January 22 to 0.88 percentage points on March 19, an increase of 0.17 percentage points. JPMorgan, the largest U.S. investment bank, recently marked down the collateral value of software company loans held by private credit funds. Stoneridge Asset Management said it would return only 11% of requested redemptions for LENDX, a fund based on consumer and small-business loans originated by fintech firms, after being inundated with redemption requests. **Fund Managers Scramble for Cash to Meet Redemptions; Wall Street Titans Smell "Financial Crisis"** As distrust of private credit spreads, the number of funds unable to meet redemption requests is mushrooming. Reuters reported on the 23rd that Apollo Global Management's Apollo Debt Solutions private credit fund received $1.7 billion in redemption requests in the prior quarter — equivalent to 11.2% of net asset value. Apollo chose not to honor all requests and limited redemptions to the 5% cap stipulated in its bylaws. Apollo Debt Solutions is a business development company (BDC) that makes open-ended loan investments to large unlisted U.S. corporations. The fund's net assets stood at $15.1 billion (approximately 22.5 trillion won) as of the end of February. Massive redemption requests have recently flooded not only Apollo Global Management but also private credit funds run by Blackstone, Blue Owl, and Ares Management. Also on the 23rd, Bloomberg reported that Cliffwater founder and CEO Stephen Nesbitt and his son Blake Nesbitt, the firm's chief investment officer, have been scrambling to secure cash for redemptions. "Cliffwater has reportedly been shopping around the market for months trying to offload roughly $1 billion worth of private credit holdings," Bloomberg said, adding that "the Nesbitts, who rode the private credit boom higher, now face a steep fall in a declining market." Bloomberg noted that "Cliffwater's flagship product holds more than 4,000 loan assets, with roughly a quarter of its portfolio in the information technology sector threatened by AI," and warned that "if Cliffwater rushes to raise cash to meet redemption demands, it could trigger a vicious cycle of declining asset values." As alarm bells ring across the market, Wall Street heavyweights are voicing concerns. David Solomon, CEO of Goldman Sachs, wrote in his annual report letter on the 20th, "It serves as a reminder that the credit cycle has not been repealed." The statement implied that economic warning signs will inevitably lead to loan defaults. Solomon added, "In recent weeks, concerns have emerged about the quality of underwriting in private credit and exposure to software companies," stressing that "increased market volatility across various risk assets, heightened geopolitical uncertainty, and the intensifying concentration of capital in AI demand even more rigorous risk management." Lloyd Blankfein, former Goldman Sachs CEO, warned at a recent event hosted by Citadel Securities that "it smells like the global financial crisis," adding, "I don't feel the storm coming, but the horses inside the fence have started to bolt." According to the WSJ on the 15th, John Zito, co-head of Apollo Global Management's asset management division, also warned at a private meeting with UBS investors in late February that small software companies acquired by private equity firms could face difficult times. In a recording obtained by the WSJ, Zito said, "I'm worried because most companies acquired between 2018 and 2022 were traded at valuations far higher than reality," predicting that "extending credit to an ordinary small- to mid-cap software company would recover only about 20 to 40 cents on the dollar." **Investing Retail Money in Zombie Companies Backfires; U.S. SEC Asks "Is Proper Loan Underwriting Being Done?"** The private credit market has grown rapidly over the past 16 years, filling the void left by banks that raised lending barriers after the global financial crisis. In the process, private funds aggressively expanded their assets under management.

Private Credit Cash Crunch Forces Tap Into Americans' Retirement Funds

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