▶ Full Post Text
>The private-credit engine that[ powered massive growth on Wall Street](https://www.wsj.com/finance/investing/investment-funds-new-financial-supermarkets-9b8187d7?mod=article_inline) is sputtering, with investors trying to pull money out of big funds, forcing firms into uncomfortable decisions and endangering their future profits.
>The latest example came Wednesday when Cliffwater told clients that investors in its largest fund asked to cash out 14% of their money this quarter. The $33 billion fund will pay out about 50% of the redemption requests, meaning that the other half will need to wait at least another quarter to exit.
>Cliffwater sold its funds primarily to individual investors, a playbook that larger competitors like [Apollo Global Management](https://www.wsj.com/market-data/quotes/APO), [BlackRock](https://www.wsj.com/market-data/quotes/BLK), [Blackstone](https://www.wsj.com/market-data/quotes/BX) and [Blue Owl](https://www.wsj.com/market-data/quotes/OWL) adopted, making them all increasingly dependent on “retail” money for growth. They harbored hopes of [getting an even bigger slice of individuals’ money](https://www.wsj.com/finance/investing/why-vanguard-champion-of-low-fee-investing-joined-the-private-markets-craze-b12a04e3?mod=article_inline), pushing to get access to 401(k)s.
>The strategy started backfiring unexpectedly in recent months. Some bad loans from both private lenders and banks raised questions about other potential losses. As a [herd mentality spread](https://www.wsj.com/finance/investing/blue-owl-fallout-sets-off-retail-investor-panic-their-advisers-are-urging-calm-e6d81c5f?mod=article_inline), investors raced to get out the door.
>At the same time, the investment firms’ stocks are tumbling, with Blue Owl now off more than 40% this year. Banks including [JPMorgan Chase](https://www.wsj.com/market-data/quotes/JPM) are reassessing the risk of their own exposure to the industry.
>Though the firms can limit how much gets out each quarter, meaning dramatic collapses are unlikely, the flight of money could stay elevated in coming quarters, analysts said. They point to a [similar slow bleed](https://www.wsj.com/articles/blackstones-big-new-idea-leaves-it-bruised-d66de361?mod=article_inline) from real-estate funds in 2022 that built up over months and took years to recover from.
>“Retail capital is going to be a lot more cautious,” said Leyla Kunimoto, an individual investor in private funds and author of a newsletter about the industry. “In the short-term there is not going to be one financial adviser allocating money to them.”
>Executives in the private-credit world say there is overreaction to a few bad investments, and that their industry is healthy. The bulk of the corporate loans the funds invest in are performing well, unlike the commercial mortgages in real-estate funds, which sank in value when interest rates jumped four years ago.
>Cliffwater’s fund has returned 0.74% this year after fees and returned nearly 9% last year with minimal losses, it told investors. It said the higher-than-usual redemptions are the result of unfounded media hysteria.
>Redemptions aren’t the only threat. The flow of new investments into the funds[ is also slowing](https://www.wsj.com/finance/investing/private-credit-warning-signs-flash-after-blue-owl-unloads-1-4-billion-in-assets-02494fab?mod=article_inline), adding pressure to stocks as analysts cut forecasts for future fee earnings.
>There are also signs that the turmoil in private credit funds is impacting other parts of the debt markets.
>One of the few investments the funds own that they can easily sell in times of trouble are bonds of collateralized loan obligations, or CLOs, which are backed by bundles of corporate loans. The higher-yielding CLO bonds that private-credit funds primarily hold lost 4.1% in February, a sharp reversal from gains of 1% in January and December, according to research by Santander U.S. Capital Markets.
>The redemption requests are putting the firms in uncomfortable situations.
>Unlike a mutual fund or a bank deposit, most of these closed-end funds limit the amount that investors can withdraw each quarter. Cliffwater spent days weighing whether to keep payouts at 5% before deciding to raise them to 7%, in part to avoid being viewed unfavorably to competitors, a person close to the company said.
>Blue Owl last month allowed investors to [withdraw 15% ](https://www.wsj.com/finance/investing/private-credit-investors-are-cashing-out-in-droves-bc1e8cbc?mod=article_inline)from a fund focused on private credit to technology companies that normally caps redemptions at 5%.
>Blackstone’s credit fund, the biggest in the industry at $82 billion, for the first time had net withdrawals, meaning more money went out than new money came in. [The fund allowed about 8% redemptions.](https://www.wsj.com/finance/investing/blackstone-played-down-private-credit-risks-now-its-been-hit-ddf46a9f?mod=article_inline)
>Others have stuck to the limits, meaning investors didn’t get all their money back. BlackRock and [Morgan Stanley](https://www.wsj.com/market-data/quotes/MS) both [only redeemed the predetermined 5% of their funds](https://www.wsj.com/finance/investing/blackrock-sticks-to-redemption-minimum-on-credit-fund-sends-shares-lower-0da83b7f?&mod=article_inline) when [investors asked for more.](https://www.wsj.com/livecoverage/stock-market-today-dow-sp-500-nasdaq-03-12-2026/card/morgan-stanley-private-credit-fund-hit-with-redemption-requests-IS8PSZh497HC5aF4CkGN?&mod=article_inline)
>Cliffwater started out as a small investor in private equity and debt about 20 years ago. The firm also provided research, including private-credit indexes that grew in popularity alongside the industry. Run by founder Stephen Nesbitt, the firm used the index business to sell individuals on funds that invest primarily in other private-credit funds and the corporate loans the outside managers make.
>Cliffwater this week sought to calm any concerns about its ability to pay out future redemptions. Between loans maturing, bank credit lines and other sources of liquidity, Cliffwater projected that it could handle two years of zero inflows and the 5% redemption rate it typically offers without selling any assets.
>In most quarters, redemption requests at Cliffwater Corporate Lending Fund came in well below 5%, with two relatively recent exceptions, according to a presentation reviewed by The Wall Street Journal.
>Investors had already been watching Cliffwater closely.
>Hedge-fund manager David Rosen of Rubric Capital Management singled out Cliffwater in a letter to investors last month that warned about the risks lurking in private-credit portfolios and urged all investors to get out of the asset class while they could.
>“We would not be surprised if Cliffwater is the canary in the coal mine and will be the first domino in the ‘bank run’ we foresee,” Rosen wrote in the letter, which the Journal reviewed.
>The private-credit industry could also see pressure on funds from the banks that lend to them, with some bankers saying they expect to become more conservative or retreat.
>Bank boards and management teams have recently launched fresh examinations of exposure to private credit including reviewing loan portfolios and collateral advance rates, according to people familiar with the matter. Still, executives said there was no evidence of a systemic issue and that banks were well-positioned to deal with any stress in private credit.
>JPMorgan reduced the amount of credit available to some private credit funds after it marked down loans they had extended to software companies, according to people familiar with the matter.
>U.S. bank loans to non-depository financial institutions that include private credit reached $1.2 trillion as of mid-last year, according to Moody’s Ratings. That was nearly triple the share from a decade ago.