Morgan Stanley and Cliffwater LLC capped withdrawals from their multibillion-dollar private credit funds after investors sought to redeem vastly more than the vehicles allow.
Cliffwater’s $33 billion flagship private credit vehicle limited redemptions to 7% of shares in the first quarter, after investors sought to pull a record 14%. Morgan Stanley’s North Haven Private Income Fund, which has almost $8 billion in assets, returned around $169 million, or less than half of investors’ tender requests, after capping redemptions at 5% of shares.
The moves are among the starkest examples yet of private credit funds grappling with a wave of redemption requests amid growing concerns over the quality of their loans, particularly to software companies under threat from artificial intelligence. While most funds had sought to meet investor demands for cash, BlackRock Inc. last week decided to limit withdrawals, a move that other managers have since followed.
Representatives for Cliffwater and Morgan Stanley declined to comment.
Meanwhile, the $1.8 trillion private credit market is facing additional pressure from scrutiny over the value of its illiquid loans.
JPMorgan Chase & Co. is restricting some lending to private credit funds after marking down the value of certain software-linked loans in its portfolios. The decline in those asset values will limit how much the bank can lend to the funds, though the move affects only a small group of borrowers and has not triggered any material margin calls so far.
As for the wave of redemptions, private credit funds focused on retail investors are typically required to offer quarterly repurchases of their shares — but aren’t built to easily accommodate a rush for the exits.
Cliffwater said a payout of 7% was a “regulatory maximum” in a Wednesday letter signed by founder and Chief Executive Officer Stephen Nesbitt and seen by Bloomberg News. A spokesperson for the firm confirmed the contents of the letter.
Managers of the Cliffwater Corporate Lending Fund had been debating whether to cap redemptions at 5% or 7% as it anticipated redemptions to exceed the higher mark, Bloomberg News previously reported.
In the letter, Nesbitt told investors the Cliffwater fund’s performance “remains strong.” He highlighted an annualized return of about 9.4% since June 2019 and a “historical track record of near zero percent in realized losses.” The fund’s liquidity as a percentage of net asset value is 21%, the letter said.
The fund honored 7% of withdrawals during the Covid pandemic and agreed last quarter to redeem 5.3% of shares, Nesbitt told investors.
In its own letter to clients, Morgan Stanley pointed to challenges facing the private credit industry broadly, including a contraction in asset yields and uncertainty around the M&A environment. Still, it expects that “some of these pressures may soon ease.”
North Haven had more than $2.2 billion of liquidity available as of Jan. 31, Morgan Stanley said in the letter, while noting a 8.9% annualized net return over three years for the fund.
“The structure of the company was intentionally designed to balance the desire to offer investors the opportunity for periodic liquidity with the less liquid characteristics of the private assets in which the company invests,” Morgan Stanley wrote.
Written by: Olivia Fishlow @Bloomberg
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