The private credit market, once Wall Street’s hottest investment craze, is now experiencing a significant meltdown, with major firms facing investor panic and redemption demands. From early summer 2023 to January 2025, private equity stocks, heavily influenced by private debt growth, saw substantial gains. Blackstone achieved 58.2% total returns, while Ares, Apollo, and Blue Owl posted 68.1%, 77.9%, and 80.6% respectively. KKR led the pack with 103.4%.
However, a sharp selloff beginning in September 2025 sent major firms reeling. Apollo dropped 41% from its peak, Blackstone fell 46%, Ares and KKR declined by 48% each, and Blue Owl lost two-thirds of its value. This wipeout has erased over $265 billion in market capitalization, with Blackstone and Blue Owl trading below their late 2021 levels.
Big PE Firms Gate Exits Amid Retail Investor Concerns
The core issue stems from private equity firms overpaying for assets during the era of ultra-low interest rates, forcing them to hold portfolio companies longer and curtailing profits upon sale. While private debt growth previously offset slumps in traditional franchises, panic is now gripping funds holding loans to software companies perceived as threatened by artificial intelligence (AI). Investors, particularly newly attracted retail participants, are demanding their money back, a situation described as resembling “a run on a bank” by Matt Swain, co-head of Equity Capital Solutions at Houlihan Lokey.
These retail investors, drawn by high yields, are proving less patient than the traditional long-term institutional holders of private credit. Significant redemption requests are causing distress for even the largest PE funds. In response, some firms are implementing “gating” mechanisms, restricting withdrawals, which further fuels investor anxiety and the desire to flee.
Semi-Liquid Vehicles Face Redemption Pressure
Historically, PE investors were primarily large institutions comfortable with capital being tied up for 8-10 years. PE firms actively sought high-net-worth and middle-class investors, successfully attracting substantial inflows. For instance, Blue Owl derives about 40% of its over $300 billion in assets under management from individuals. This strategy aimed to “democratize” access to products previously available only to pension funds and billionaires, offering attractive returns like the Blackstone Private Credit Fund’s (BCRED) 9.8% annual return since inception.
These products, known as “semi-liquid” vehicles, often take the form of Business Development Companies (BDCs) not traded on exchanges. Investors can request redemptions, but PE managers typically cap quarterly withdrawals at a fixed percentage of net asset value, often 5%. This category surged from $200 billion in assets under management (AUM) at the start of 2022 to $500 billion by Q3 of last year, according to Morningstar.
The trouble began in September 2025 with the bankruptcies of subprime auto lender Tricolor and car-part maker First Brands, whose debt was held by banks. However, the fear that AI could render large segments of the software industry obsolete prompted a wave of redemptions from retirement savers.
Blue Owl was among the first to restrict withdrawals in November 2025. In February 2026, the firm bought back 15% of outstanding shares in one fund and ended regular quarterly liquidity payments for another. Blackstone‘s BCRED saw investors seek to pull $3.8 billion, or 7.9% of assets. The firm raised $400 million from its own capital and executives to meet these requests. The contagion spread to other major fund managers, including Cliffwater‘s $33 billion private credit fund, where shareholders sought to withdraw 7%. In early March 2026, BlackRock restricted withdrawals on its $26 billion HPS Lending Fund. Morgan Stanley faced repurchase requests for 10.9% of shares in its North Haven Private Income fund, returning $169 million and capping payouts at 5%. In Canada, approximately 40% of the $30 billion invested in private real estate funds is now gated.
J.P. Morgan‘s decision to restrict lending to private debt funds echoed CEO Jamie Dimon’s earlier warning about “cockroaches” lurking in the financial system.
Secondary Funds Emerge as Potential Market Stabilizers
Many semi-liquid funds invested in mid-sized software companies, a sector that appeared stable until late last year. Some managers reduced their cash reserves, typically held in short-term treasuries, to boost returns, instead placing these “reserves” in syndicated debt. This included many software bonds that subsequently declined in value, leading to shortfalls when sold to meet redemptions.
Jon Gray, Blackstone‘s president and CEO, argues that withdrawal caps are a feature, not a bug, trading liquidity for higher returns, a common practice for institutional investors. He maintains that despite software sector concerns, the funds are diversified, and companies whose debt they hold are not in danger of defaulting. Gray suggests the restrictions ensure limited partners (LPs) receive full value by holding shares long-term, rather than selling at a discount.
However, if a large number of retail investors, unaccustomed to this tradeoff and spooked by AI news, sell en masse, the funds’ net asset values could decline irrespective of actual credit performance. Private equity firms are hesitant to sell bonds at fire-sale prices to meet redemptions, which would harm remaining investors. This situation creates an opportunity for “secondary funds” that specialize in buying stakes from LPs seeking early exits.
Secondary funds operate in two main ways: purchasing existing positions from investors wanting out, or utilizing “Continuation Vehicles” (CVs). CVs allow a PE firm to replace investors who wish to cash out with a new group, while the sponsor continues to manage the asset. This segment has grown rapidly, reaching $100 billion and representing about one-fifth of all PE exits. While primarily used for equities, the model is expanding into credit.
In a credit CV, a new fund is established by buyout investors, managed by the original PE firm, to purchase stakes from investors seeking to exit a private credit fund. Firms like Houlihan Lokey facilitate this by raising capital for PE sponsors to acquire companies or establish CVs. Matt Swain of Houlihan Lokey views both regular secondaries and CVs as solutions that provide liquidity for exiting investors and a pathway for fund managers to manage new capital without forced asset sales.
“The CV investors are often a different breed… They’re chiefly family offices, endowments, and foundations, sophisticated players who will want to stay in these deals,” Swain told Fortune. “They’re also highly opportunistic, and they’ll seize the chance to purchase at discounts that generate superior returns in the long-term.” Swain believes CVs can stabilize the market, reassure LPs, and prevent a spiral of redemption demands.
Houlihan Lokey is actively involved in CVs, helping PE firms find investors to replace those exiting. “CVs are the option that the market hasn’t priced in yet,” says Swain. “It’s what could prevent a big drop in the value of these funds. It will allow the LPs to take out 100% of their liquidity.” He notes that CV investors will still seek favorable prices, and skepticism regarding some software debt is valid, potentially leading to discounted sales.
Major PE firms like Blackstone and Apollo operate their own secondary funds, purchasing shares from investors seeking early exits. These pools also place new investors into continuation vehicles. While they haven’t announced specific plans for private credit secondary purchases, their fundamental models focus on funding durable cash-flow-producing assets, suggesting a low expectation of widespread defaults.
Other significant players in the secondary market include HarbourVest Capital, Coller Capital, Pantheon Ventures, Tikehau Capital, and Ardian. The private credit market is valued at $1.8 trillion, with the secondary market around $200 billion. If redemption demands surge, the secondary market’s capacity to absorb selling pressure remains uncertain. However, Swain anticipates increased capital flowing into secondary funds as attractive deals emerge, enhancing their capacity to support the market.
CV investors are characterized as “marathoners,” often family offices that prefer evaluating existing enterprises with track records over selecting new companies. They focus on individual deals and are committed to long-term investment, contrasting with the short-term focus of some retail investors.
Fonte: Fortune
