US private credit fund managers are having a difficult year. In recent weeks, several funds have suffered heavy redemptions by alarmed retail investors.
Redemptions lead to scary headlines, which cause more withdrawals — a familiar, dreaded cycle.
The troubles started at listed business development companies (BDCs) — vehicles set up to lend to small and medium-sized companies. They have lost 16% of their value since last summer.
The anxiety has now spread to unlisted funds, which are returning money to investors at record rates.
Some managers have stuck to their terms and conditions, which often cap all investors' quarterly redemptions at 5% of the assets. Others, like Blackstone, have sought to hand back more cash to calm investors' nerves.
Magnanimity of this sort can backfire. Swollen redemptions and the asset sales they cause can exacerbate investors' fears that there is something wrong in private credit and make them scramble for the exits, leaving funds stuck with their most illiquid assets and unable to meet later redemptions.
Lingering memories of 2008 set alarm bells ringing whenever funds holding funky assets start to falter.
But this is not 2008. Crucially, bank lending to private credit funds remains limited, and banks do not look likely to be dragged down.
As long as private credit funds keep meeting redemptions at a reasonable rate, honouring the contractual terms their investors agreed to, self-fulfilling panic and fire sales should be avoided.
At the heart of this stress are concerns about the impact of artificial intelligence on software firms, a sector to which private credit has lent heavily. While the risks are real, the focus on private credit has been excessive.
If fears about software are warranted, the angst should centre not on private credit but on private equity.
As senior lenders, private credit funds ought to be able to recover most of their money in time, even if defaults rise.
Private equity could get stuck in software companies as their business models crumble. Even exits at unambitious prices might become impossible.
Right now, the market is fretting about sharp liquidity crises, leading to overnight stress and blow-ups.
The real risk may be a long, slow burning of institutional capital in private equity funds.