A Private Credit Liquidity Crunch Has Already Started | Leyla Kuniomoto
Summary
- A liquidity crunch is underway in semi-liquid private credit funds (e.g., Cliffwater, Blackstone, Ares, Apollo), with redemption requests exceeding quarterly 5% caps, leading to pro-rata payouts.
- The core mechanic of these "evergreen" funds is a feature, not a bug: the cap prevents fire sales of assets (like direct loans to middle-market companies) to protect remaining investors, though it creates investor frustration.
- Publicly traded Business Development Companies (BDCs) are currently preferred over private/non-traded BDCs because they trade at a discount to Net Asset Value (NAV), offering a potential arbitrage if the gap closes, and they lack the structural liquidity pressure of quarterly redemptions.
- The primary risk is not necessarily asset quality (defaults remain low) but a potential multi-quarter slowdown in new investor inflows, which would reduce capital available for new loans and refinancings, pressuring borrowers and potentially widening spreads.
- Within private credit, transparency varies: direct loans are more transparent than holdings of Collateralized Loan Obligation (CLO) equity, which is volatile, junior in the capital stack, and harder to value.
- "Shadow defaults" via Payment-In-Kind (PIK) interest toggles are a critical signal of borrower stress, with averages around 8% across the space, though data requires manual extraction from financials.
- The speaker is significantly more bearish on private equity than private credit due to extreme opacity, junior position in the capital structure, and lack of visibility into underlying company performance.
- The current stress tests the "perpetual capital" model; a prolonged inflow drought could force fund shrinkage, impacting fee income for asset managers (e.g., Blackstone, Ares, Apollo) and testing regulatory leverage limits.
- The situation with Blue Owl's OBDC2 fund is distinct as a legacy vehicle in wind-down, not a reflection of the broader evergreen fund model's health.
Trade Ideas
Leyla explicitly states she prefers public BDCs "by far" over private BDCs because she can "enter at a price that they deem good," specifically at a discount to NAV (e.g., 80 cents on the dollar). Public BDCs trade on an exchange, allowing investors to buy at a market-determined discount, whereas private BDCs redeem at NAV. The discount represents an immediate potential return if it closes. Furthermore, public BDCs do not face the structural liquidity pressure of meeting quarterly investor redemptions, unlike private funds. LONG because the discount to NAV offers a clear valuation gap, and the structure avoids the redemption-driven liquidity management issues currently plaguing private funds. The NAV of the BDC could be inaccurate or decline. The discount may persist or widen if market sentiment worsens further.
Leyla states she is "watching the equity of the asset managers" like Blackstone, Ares, and Apollo, noting that sentiment is very negative and fee revenue is likely to decline as assets under management in their semi-liquid funds shrink due to outflows. These alternative asset managers' revenues are tied to fees from capital managed. The current redemption crisis in their semi-liquid private credit funds threatens to shrink that asset base. Extreme negative sentiment may have created a potential opportunity. WATCH because the negative catalyst (fee pressure) is clear and present, but extreme pessimism may have created a future entry point. It is not yet a buy signal. Outflows could be more severe and prolonged than expected, leading to greater fee erosion. The equity may not be cheap enough to compensate for the fundamental pressure.
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