Jittery private credit investors are rushing for the exits just like your coworkers when you start microwaving leftover salmon for lunch. This week, investment giants Apollo Global Management and Ares said they are limiting payouts to shareholders in their private credit funds as investors’ requests to pull their cash soar across the industry.

Meanwhile, Moody’s downgraded the credit rating of a private credit fund run by KKR and Future Standard yesterday, sending its debt into “junk” territory after more of its borrowers stopped paying their loans.

The news adds to Wall Street’s anxiety about the health of a $1.8 trillion industry that’s suffered from significant defaults and faces fears that it’ll get pummelled if AI disrupts software companies—which JPMorgan estimates account for 30% of its loans.

Rationing cash

Private credit funds, which plug investors’ money into risky loans to midsized companies, typically guarantee that they’ll offer to pay out 5-7% of the value of the investments quarterly.

But last quarter, cash supply couldn’t keep up with withdrawal demand:

• Investors in Apollo’s and Ares’s private credit funds asked to exchange over 11% of their shares for cash.
• Both companies said they’ll pay out less than half of what investors asked for to ensure total payouts don’t exceed 5% of the fund’s value.

Meanwhile, private credit peers like Blackstone and Blue Owl Capital have sought to calm investors by letting them pull more cash than the guaranteed minimum.

Banks try to see the upside

After post-2008 financial crisis regulations restricted banks’ ability to lend to risky borrowers, private credit swooped in to occupy that niche. Now, banking giants like JPMorgan—whose CEO, Jamie Dimon, is a longtime skeptic of the opaque industry—are letting clients bet against private credit.

But it’s no gloatfest…as many private credit lenders are also bank borrowers, which means the likes of JPMorgan could get caught in the turmoil.—SK