What is an unlisted private credit fund?

A private credit fund is an investment vehicle that lends money to companies, often SMEs or mid-caps. These operations take place outside the traditional banking circuit.

Unlike a stock or a bond listed on an exchange, there is no market where one can resell their share at any time. These funds are referred to as "unlisted": to exit, the investor must apply directly to the manager and request that they repurchase their shares. This is known as a redemption request.

Why do managers limit exits?

The fundamental issue is that these funds invest in illiquid assets, meaning that their shareholders cannot recover their money overnight, or at least not in favorable financial conditions.

If too many investors want to exit simultaneously, the manager is forced to sell off assets at a discount to raise cash, which penalizes the remaining investors.

To prevent this, the rules of certain funds (the aptly named "semi-liquid funds") set a redemption limit, typically 5% of the fund's Net Asset Value (NAV). If redemption requests exceed this threshold, they are capped: investors only receive a fraction of what they asked to withdraw. This mechanism is called a redemption cap or repurchase limit.

What individual investors need to remember

The vast majority of these funds are marketed to wealthy investors (high-net-worth individuals, family offices) and institutional investors (insurers, pension funds, etc.) with the promise of yields higher than those of public markets. In return, however, they deal with two constraints: they cannot recover their money whenever they want, and they accept an above-average level of risk.

Periods of stress amplify redemption requests. Historically, these phases have been triggered by economic crises or interest rate hike cycles (the financing market is naturally very sensitive to these). However, in recent months, another phenomenon has emerged. The breakthrough of AI in several sectors, particularly software, has created doubts regarding the valuation of certain assets and the ability of some companies to honor the debts they have contracted with private credit funds.

Why is this a current topic of discussion?

When a fund activates a redemption cap clause, the information is quickly made public. This can create a chain reaction that is very difficult to control: other worried investors also seek to exit, amplifying the phenomenon. When several funds face the same problem, market sentiment can rapidly darken and create a vicious circle.

For several months, funds specializing in unlisted assets have been experiencing difficulties. This applies to private credit, but also to private equity funds, which are exposed not through loans but through equity investments. There have been several resounding bouts of weakness amongst fragile players.

In recent weeks, even more robust managers have been confronted with the deteriorating quality of certain segments of their debt or asset portfolios. Their clients, seeking to manage their risk, have wished to reduce their exposure. Consequently, redemption requests have multiplied, eventually hitting the aforementioned caps. Blue Owl, Apollo, Morgan Stanley, Cliffwater, Partners Group, and Blackstone are among managers affected. Naturally, this sends a negative signal to the rest of the market, which wonders whether things will eventually settle down or if a systemic risk is beginning to materialize.