NEW YORK, March 12 (Yonhap) – Redemption requests have surged at one of the largest private credit funds in the United States, forcing manager Cliffwater LLC to pay out only about half of what investors sought as worries grow over loan losses tied to the software sector and artificial intelligence (AI).
Cliffwater’s flagship Cliffwater Corporate Lending Fund received first-quarter redemption requests equal to 14% of its outstanding shares, according to an investor letter cited by Bloomberg on Tuesday. The interval fund, which manages about $33 billion in assets, is one of the fastest‑growing vehicles in the private credit market and is popular with wealthy individual investors.
Under its terms, the fund caps redemptions at 5% of net assets per quarter but can lift that ceiling to as much as 7%. For the current quarter, Cliffwater set the limit at the maximum 7%, meaning investors will receive roughly half of the cash they requested.
The move places Cliffwater alongside a growing list of private credit managers that have begun restricting withdrawals as investors reassess risks in a market that has boomed since the global financial crisis by stepping into lending roles once dominated by banks.
Retail tilt seen as vulnerability
Cliffwater has distinguished itself by raising large sums from high‑net‑worth individuals rather than traditional institutional clients. The British Financial Times reported that the firm attracted $16.5 billion from wealthy investors last year alone, outpacing rivals including Ares Management, Blue Owl Capital, Apollo Global Management and BlackRock’s HPS Investment Partners.
That retail tilt is now being viewed as a point of vulnerability. Analysts say individual investors tend to move more quickly to redeem during periods of market stress, increasing the risk of clustered withdrawal requests that can strain funds invested in illiquid assets.
“Relying heavily on non‑institutional capital makes these vehicles more exposed to sentiment swings,” one New York‑based credit strategist said. “When headlines turn negative, the redemption queues can build very fast.”
AI threat to software revenue models
The spike in redemption requests comes as Wall Street banks and asset managers warn that rapid advances in AI could undermine the business models of established software companies, raising the risk of credit deterioration in the sector.
Within and beyond Wall Street, analysts have cautioned that disruptive AI technologies may erode revenues and margins for legacy software providers, potentially weakening their ability to service debt. Those concerns are particularly acute for private credit funds that have extended loans to mid‑sized and highly leveraged technology firms.
Reflecting those worries, JPMorgan Chase has recently marked down the value of collateral backing loans in certain private credit funds exposed to software borrowers, according to market participants. The bank’s more conservative valuations underscore fears that existing book values may not fully capture the risk of future loan losses.
Diverging responses across managers
Asset managers have taken varied approaches to the mounting redemption pressure.
HPS Investment Partners, the private credit arm of BlackRock, recently enforced a 5% cap on quarterly withdrawals for one of its private credit funds, declining to meet all investor requests, according to people familiar with the matter.
By contrast, Blackstone accepted redemption requests equal to 7.9% of the shares in its flagship private credit vehicle, the Blackstone Private Credit Fund (BCRED), or about $4.2 billion based on recent disclosures, signaling greater willingness to provide liquidity despite market jitters.
Blue Owl Capital and Ares Management both honored redemption volumes above their usual limits in the fourth quarter of last year, industry sources said. However, Blue Owl later moved to permanently halt redemptions in one of its funds, a step that has unsettled some investors and drawn attention to liquidity constraints across the sector.
Debate over valuation and fundamentals
Leaders in the private credit industry insist that underlying credit quality remains sound and that current fears are overstated. They point to low realized default rates so far and argue that loan structures, covenants and collateral coverage provide adequate protection against losses.
“Fundamentals across our portfolios are stable, and we see no evidence of systemic stress,” one senior private credit executive said, speaking on condition of anonymity because they were not authorized to discuss client flows. “Market narratives are moving faster than the actual credit data.”
Skeptics counter that such assurances may be premature. Because private credit loans are not traded on public markets and are often held at amortized cost, critics argue that net asset values can lag real‑time changes in credit risk, especially in sectors facing technological disruption.
“The opacity of private credit makes it hard to know whether valuations fully reflect emerging risks,” said a portfolio manager at a U.S. pension fund. “If AI accelerates revenue pressure in software, some of these marks could prove optimistic.”
Illiquidity and structural limits
Private credit refers to lending by non‑bank financial intermediaries, such as asset managers and investment firms, rather than regulated banks. The market expanded rapidly after post‑crisis regulations tightened capital and risk requirements for banks, opening the door for alternative lenders to fill the gap in corporate financing.
Many of these funds offer periodic liquidity—typically monthly or quarterly—while investing in loans that can take months to sell without significant discounts. To manage that mismatch, managers impose redemption gates or proration mechanisms, like the 5–7% quarterly cap used by Cliffwater.
Such structures are designed to prevent forced asset sales at distressed prices, but they also mean investors cannot always exit when they want, particularly during times of stress.
Stress test for a booming asset class
The recent wave of redemption limits and payout delays is being watched closely as a test of resilience for a market that has grown into a multi‑trillion‑dollar pillar of corporate finance.
For now, most managers and analysts say the pressures remain manageable and are confined to specific funds and strategies. But if concerns over AI‑driven disruption and software‑sector weakness deepen, more funds could face redemption queues and closer scrutiny of their valuations.
“The combination of opaque assets, rising technological risk and more retail capital is a new mix for private credit,” the New York credit strategist said. “How funds like Cliffwater navigate this period will shape investor confidence in the asset class for years to come.”
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