"Private credit storm" re-emerges? Following Partners Group, Blackstone (BX.US) also limits redemptions.

One of the world's largest alternative asset management institutions, Blackstone Inc. (BX.US), has for the first time restricted the redemption of its flagship private credit fund, after investors had aggressively sought to redeem up to 10% of their shares. This private credit fund has also become the latest fund to restrict withdrawals amid ongoing investor withdrawals. This latest news in private credit is seen as a somewhat negative and indicative of deteriorating conditions in the private credit industry, especially because BCRED is not a small fund, but one of Blackstone's most representative flagship private credit products. It is worth noting that before Blackstone took measures to restrict redemptions, the Swiss alternative asset management giant Partners Group had caused a market stir. The company had earlier announced restrictions on redemptions for its flagship Evergreen private equity fund Global Value SICAV, which has a size of $8.6 billion. As redemption requests had reached 9.8% of the fund's net asset value, the company decided to limit redemptions to 5%. After the news was announced, Partners Group's stock price plummeted more than 16% on Wednesday, dragging down alternative asset management stocks such as Blackstone, KKR (KKR.US), Blue Owl Capital (OWL.US), Ares Management (ARES.US), and Carlyle Group Inc. (CG.US). However, these stocks rebounded on Thursday. Now, with Blackstone's flagship product BCRED also joining the ranks of restricted redemptions, concerns about liquidity risks in the private credit industry are once again escalating. According to documents submitted on Thursday, BCRED will only fulfill 5% of investors' redemption requests, while investors had previously requested redemptions of about 10%. Based on the fund's size, the redemption amount in this round is approximately $4.4 billion. BCRED, short for Blackstone Private Credit Fund, is one of Blackstone's most important private credit platforms, and is a non-listed BDC (business development company) product aimed at wealth management channels and qualified investors, mainly investing in senior secured floating-rate loans of large enterprises. Blackstone has long positioned it as a flagship private credit product for investors seeking stable returns. In fact, BCRED also faced record redemption pressure in the previous quarter, when redemption requests reached 7.9%, exceeding the fund's usual quarterly redemption limit of 5%. However, at that time, Blackstone chose to increase the buyback amount, with the participation of employees contributing approximately $400 million of their own funds, ultimately meeting all redemption demands. This time, the situation is completely different. Faced with close to 10% redemption requests, Blackstone did not further increase the buyback proportion or use additional capital to make up the difference, but strictly enforced the 5% quarterly limit. This means that BCRED has truly initiated a redemption restriction mechanism for the first time, becoming the latest flagship private credit fund to restrict investor withdrawals due to redemption pressure. At the same time, redemption pressure is spreading throughout the entire alternative asset industry. In February of this year, the US alternative asset management company Blue Owl was the first to implement a permanent redemption restriction for one of its private credit funds with a size of $1.6 billion. Subsequently, Blackstone's flagship private credit fund BCRED with a size of approximately $82 billion, BlackRock, Inc.'s HPS Corporate Credit Fund with a size of $26 billion, and private credit products managed by Cliffwater have successively reached their redemption limits. Market institutions predict that some private credit funds may receive redemption requests in the second quarter ranging from 15% to 53% of their net asset value. In addition to private credit, redemption pressure is beginning to spread to the private equity sector as well. Partners Group CEO David Layton has stated that the outflow pressure, originally concentrated in the private credit sector, has now begun to spread to other alternative asset categories. Liquidity Mismatch: The Core Concern of Private Credit The current market's most worrying issue is not the redemption restrictions of individual funds per se, but the long-standing liquidity mismatch problem in the private credit industry. The underlying assets of private credit funds are mostly illiquid corporate loans with durations of 3 to 7 years, yet the product design typically allows investors to redeem funds on a quarterly basis. This model operates well in periods of market stability, as new capital inflows are sufficient to cover sporadic redemption demands. However, when market sentiment deteriorates and investors collectively withdraw, the issues begin to surface. In the first quarter of this year, private credit funds with a total management size of about $300 billion only fulfilled slightly over half of redemption requests, leaving a large number of investors waiting for the next redemption window. For the private credit industry, the so-called "semi-liquidity" is essentially a liquidity arrangement based on market confidence. When more and more investors rush for the exits simultaneously, the redemption mechanism shifts from a buffer to an amplifier of pressure. AI Impact and Asset Quality Concerns Behind the wave of redemptions on the funding side, deteriorating asset quality has also become a focus of market attention. The software industry has long been one of the most important risk exposures in private credit, accounting for over 40% of the overall allocation. Since the beginning of this year, the AI wave driven by companies like Anthropic has been heating up, and concerns about the impact of AI technology on traditional software enterprise models have intensified. The near-zero marginal cost automation ability of AI technology is weakening the product barriers and profitability of some SaaS software enterprises, posing challenges to their high gross margins and customer retention rates. Morgan Stanley had previously warned that in extreme scenarios, private credit market default rates could rise to around 8%. Meanwhile, to alleviate cash flow pressures, more borrowing companies are beginning to use PIK (Payment in Kind) mode, where interest is added to the principal and deferred payment. This arrangement, known as "paper profit," is often seen as a warning sign of rising credit risks. Market participants generally believe that the sharp revaluation of the software sector triggered by the AI theme since February is not the starting point of this round of private credit storm, but has become an important catalyst driving the rapid spread of risk sentiment. In fact, earlier triggers came from corporate loan default events such as First Brands and Tricolor. These cases have reignited concerns about opaque valuations, declining credit quality, and liquidity mismatches in the private credit industry. Industry Crisis or Systemic Risk? As redemption pressure continues to build, the divide on Wall Street regarding the private credit industry is becoming increasingly apparent. JPMorgan Chase CEO Jamie Dimon has described the troubled companies in the private credit sector as "credit cockroaches" and has repeatedly warned that some industry players are taking on excessive risks. Howard Marks, co-founder of Oaktree Capital, has also mentioned that the rapid expansion over the past decade has led to a general decline in the industry's professionalism, with obvious cracks appearing in certain areas, and the market may underestimate the severity of these issues. At the same time, Wall Street has started to focus on short tools such as credit default swaps (CDS) around the design of private credit products, and the Federal Reserve, the US Treasury, and the Financial Stability Board (FSB) have begun to pay attention to industry risks. However, many institutions believe that the current market concerns are being overly amplified. Bruce Flatt, CEO of Brookfield Corporation, previously stated that the current situation in the private credit market is "absolutely not the 2008 financial crisis." The financial information services group Debtwire also points out that the private credit industry has low transparency, which can easily lead the market to fill in information gaps with the most pessimistic assumptions. While there has been significant expansion and some irrational prosperity in the industry in recent years, the current market size and systemic importance are still far below the US real estate market before the 2008 financial crisis. Although most views believe that the risks in private credit are currently limited to the industry level, the probability of evolving into a systemic financial crisis is relatively low, as redemption pressure spreads to top institutions, liquidity mismatches continue to be exposed, and the revaluation of credit risks from AI brings about a continuous pressure test for the $2.1 trillion private credit market.