How Private Credit Managers Can Stay Resilient During the Current Downturn
There’s an old saying: “Never let a crisis go to waste.” That wisdom feels especially relevant in private credit today.
What began with private-credit behemoth Blue Owl Capital Inc. changing the redemption terms on its OBDC II fund, which caters to retail investors, has escalated into a rush for the exits, as redemption requests soar across the industry. Multiple firms have responded by restricting redemptions on their private-credit funds after such requests surged above their quarterly limits.
The industry has been quick to point out that this episode has little to do with poor investment performance, but is instead a disconnect between media narratives and on-the-ground fundamentals. The irony is that the recent events expose an uncomfortable truth: Headlines can be part of the fundamentals when jittery investors scramble for the exits at the first sign of trouble.
Private-credit managers may seem powerless against negative publicity and nervous investors. Yet, there are several steps managers can take to not only weather the storm, but potentially emerge stronger on the other side:
1. Don’t be shy about restricting redemptions
Until recently, restricting redemptions, or “gating,” carried a heavy stigma, and for good reason. When a fund imposed restrictions, managers would argue that redemptions had simply overwhelmed liquidity, that there was no fundamental issue with the portfolio and that valuations were sound. But that explanation only goes so far when other funds manage to stay open without similar trouble.
Recently, however, many funds have been gating, including some that had previously avoided scrutiny. As a result, the justification for not meeting all redemption requests in the face of reactive investor behaviour should carry more credibility. If an asset manager is caught up in this storm, and gating is truly in the best interest of the fund, they should not feel so hesitant to do what’s right.
2. Be opportunistic on the investing side
As private credit expanded at breakneck speed, skeptics warned that an influx of capital would inevitably weaken underwriting standards. Now with redemption requests surging, the opposite dynamic could very easily take hold.
There are already reports of assets being shopped around as firms look to raise cash within their private-credit funds to meet redemption requests. This presents an opportunity for managers with dry powder to either acquire these portfolios at attractive valuations, or continue lending in a market where capital should become more scarce. There may not be a lot of managers in this enviable position, but for those who are, this could be an excellent opportunity to get some strong returns.
3. Improve the messaging
Capital that isn’t truly prepared to be locked up for multiple years doesn’t belong in private markets. Yet, this investor exodus has revealed that a meaningful share of private-credit capital came from investors unprepared for illiquidity. One could argue this is a natural growing pain for the industry, as few emerging asset classes ace their first real stress test. Still, the industry needs to approach this moment with self-awareness and constructive criticism if it’s going to mature and build lasting resilience.
For starters, advisers must clearly communicate the risks of gating when recommending private-market funds, and emphasize that even the strongest managers can be affected if redemption pressure is high enough. Meanwhile fund managers should actively encourage that level of transparency from advisers. However the message is delivered, it needs to be done far more effectively.
The good news is that with a fresh real‑world example top of mind, new investors are likely to grasp that message much more easily, and if they do, everyone will be better prepared when the next stress event arrives.
Benjamin Sinclair is an investment adviser and associate portfolio manager at Designed Securities. His newsletter and podcast on private markets can be found at www.BeyondTheExchange.ca.
This article was first reported by The Globe and Mail
