Redemption restrictions trigger a crisis of trust! Morgan Stanley (MS.US) follows suit by "closing gates," causing a collective bloodbath in financial stocks.

After limiting withdrawals from a private credit fund under its umbrella, Morgan Stanley (MS.US) saw its stock price fall on Thursday, along with several other major asset management companies. Morgan Stanley's stock price fell by 4.1%, closing at its lowest level since October of last year. Apollo Global Management Inc (APO.US), KKR (KKR.US), and Ares Management (ARES.US) all fell by more than 3%. The KBW Bank Index fell by 2.5% for the sixth consecutive trading day. After investors attempted to redeem funds far exceeding the allowed amount, Morgan Stanley and Cliffwater became the latest fund management institutions to implement redemption restrictions on private credit funds worth billions of dollars. Recently, private credit funds have been facing a wave of redemption requests, as concerns about the quality of their loans have been increasing - especially for loans to software companies facing the impact of artificial intelligence. While most funds have been trying to meet investors' cash needs, BlackRock, Inc. (BLK.US) decided last week to limit withdrawals, a move that was subsequently followed by other management institutions. Bloomberg Intelligence analyst Herman Chan said, "Given the interconnectivity between banks and their exposure to private credit companies, negative news about redemption gates continues to weaken the market sentiment in the banking sector. Although banks have relatively limited direct loan exposure to private credit, the market is currently selling first and asking questions later." Financial stocks experiencing turmoil These redemption restrictions have become the latest negative catalyst for alternative asset management companies and bank stocks. Concerns about competition in artificial intelligence tools and services, as well as worries about potential risk exposure in private credit, continue to weigh down the stock performance of banks, payment companies, and asset management companies. Meanwhile, Blue Owl Capital (OWL.US) recently informed investors that there were no downside clauses or hidden incentives in the $1.4 billion loan transactions it sold from three funds. The asset management company's stock price fell by nearly 5% on Thursday before narrowing its decline. Data shows that the stock is currently in a severely oversold state. Additionally, the US stock market fell on Thursday as oil prices surged again, causing concerns in the market - the Middle East conflict could further squeeze energy supply and push up inflation, with the S&P 500 falling by 1.5%. $1.8 trillion private credit market faces redemption wave For months, executives in the private credit industry have had a vague sense that a reckoning was coming. A series of high-profile blow-ups have shaken investor confidence. Market unease over the large concentration of private credit exposure in software companies vulnerable to artificial intelligence is mounting. Meanwhile, retail investors, who fund companies have spent years courting, began withdrawing from the industry's largest funds, putting pressure on the redemption limits designed to prevent forced selling of loan assets. Subsequently, BlackRock, Inc. drew a line. The company announced last Friday that it would limit redemptions from its $26 billion HPS Corporate Lending Fund to 5%, whereas investor requests for redemption had almost reached twice that proportion. This marked the first time that a major private credit manager had restricted redemptions in a perpetual fund since market tensions began. For an industry already swollen to $1.8 trillion and poised to enter the US 401(k) retirement account market, this step is unsettling. It could trigger a backlash among retail investors, who are increasingly anxious to withdraw funds. It also reaffirms long-standing warnings from industry skeptics - that selling illiquid assets to easily panicked clients entails risks. However, in private conversations, many industry executives have expressed that they had actually hoped for industry giants like BlackRock, Inc. to take the lead in this measure, providing "cover" for other companies. They believe that the alternative option posed a greater risk - if all redemption requests were met, the impact could far exceed the current quarter - not only crowding out capital for new trades but also harming long-term investor interests and setting expectations that these funds had never intended to meet. Similar to hedge funds struggling to trade difficult assets, private credit firms' loans are often difficult to sell quickly. To avoid being forced to sell assets at a low price in times of investor panic, most funds aimed at retail investors set structural limits - allowing redemptions of up to 5% of the fund's net assets per quarter. However, this upper limit is not set in stone. In recent months, some managers have allowed redemptions exceeding this proportion, while emphasizing the overall health and high returns of their investment portfolios. They hope that this flexibility can alleviate investors' anxiety. But this approach has caused controversy - whether short-term image is overshadowing long-term discipline and ultimately rewarding investors who flee first. Some industry executives even oppose referring to the redemption limit as a "gate," as this proportion is inherent in the fund's structure. And if not strictly enforced, this notion will be weakened. Compared to BlackRock, Inc., Blackstone (BX.US) took an unprecedented approach, showing confidence in the private credit revival while allowing investors to withdraw funds. The company last week permitted investors to redeem a record 7.9% share of its flagship $82 billion private credit fund BCRED. To meet the demand, the company utilized approximately $150 million from investments by over 25 senior executives and about $250 million of the company's own funds. Sources said that due to high redemption demands in the previous quarter (including in BCRED), Blackstone had already prepared for situations where redemptions exceed 5%. Management made decisions based on net capital flows and liquidity conditions and quickly determined that both were healthy enough to allow full redemptions. This move not only surpassed the standard 5% quarterly redemption limit but also exceeded the additional 2 percentage points of buffer space generally deemed acceptable. Previously, Blue Owl Capital (OWL.US) had allowed investors to redeem over 15% of net assets from its tech-themed fund in the fourth quarter of last year. Many funds, including large BDCs managed by Apollo Global Management Inc, Ares Management, and Blue Owl Capital, are still in the first quarter redemption window, and investors are actively deciding whether to withdraw funds. Most funds are still attracting new capital, but inflows have been lower than redemptions. JP Morgan Tightens Private Credit Fund Loans; PIMCO Warns of Industry "Liquidation" Arrival Against the backdrop of increasing pressure in the private credit market, JPMorgan (JPM.US) has begun restricting loans to certain private credit funds due to the bank's downgrade of the value of certain loans in its investment portfolio. Additionally, there are reports that JPMorgan is in the process of conducting a reevaluation of the private credit investment portfolio held on its balance sheet and has voluntarily reduced the book value of the related assets. Sources revealed that JPMorgan's action this time involved loans to software companies, an industry that has recently attracted attention due to investor concerns about the potential impact of artificial intelligence. Reports indicated that JPMorgan CEO Jamie Dimon had stated at a meeting last week that the bank would be more cautious when providing loans for software assets. Dimon had previously warned in October that there would be more "cockroaches" in the once prosperous but opaque private credit sector, where prices are usually not disclosed. In recent weeks, concerns have escalated, partly due to investor unease about the risks posed by AI to some borrowers and also about valuation concerns. Last month, a fund from Blue Owl Capital suspended quarterly redemptions and began selling assets to return funds to investors. However, sources said that JPMorgan's move was a precautionary measure and not the first time the bank had reassessed its assets. Meanwhile, senior executives at The Pacific Investment Management Company (PIMCO) strongly criticized the industry for lax underwriting standards over the years and now face a "liquidation." PIMCO President Christian Stracke bluntly stated in a recent podcast that the market is undergoing a "liquidation." "This is not just a crisis of confidence, but a crisis created by abysmal underwriting standards," he pointed out, noting that years of relaxed credit standards are now resulting in pressure, especially after problems emerged at some well-known companies, exacerbating concerns about loan quality and risk exposure to software companies. Christian Stracke predicted that default rates would rise to mid-single digits in the coming years and investor returns could drop from around 10% to 6%. However, he emphasized that it was not expected to trigger a broader credit crisis. He pointed out that the lack of transparency in the field meant that when some loans are written down to zero, some investors may be "quick to assume that all other assets are equally bad," but this is not necessarily the case. He believes that as long as the US economy performs well and the Federal Reserve leans towards easing or maintaining interest rates, a spiral of tightening credit is unlikely to occur. As one of the early critics of private credit, PIMCO has always been attentive to this field. Analysts Lotfi Karoui and Gabriel Cazaubieilh wrote in a report earlier this month that the record fundraising spree after the 2008 financial crisis meant that direct lending instruments are now facing a true stress test.