Questions Raised Over Private Credit Business ... BDCs Also Put to the Test

Market Enters Phase of Scrutiny as Private Credit Redemptions Spread

The private credit market, which has attracted a surge of retail (individual investor) capital, is facing mounting redemption pressure, placing the entire industry under scrutiny. The redemption issue that began with the unlisted BDC (business development company) of global private equity firm Blue Owl has sparked a debate over the reliability of private credit fund NAVs (net asset values), drawing significant attention from the market. Listed BDCs employing similar strategies are also seeing their stock prices trade at a wider discount to NAV, reflecting a decline in investor sentiment.

BDC (Business Development Company)

A type of public fund that must invest more than half of its assets in unlisted venture companies with high growth potential. Unlike traditional innovation and venture investments, which have been limited to private equity funds for high-net-worth individuals and institutions, BDCs are designed to enable retail investors to invest indirectly.

On March 10, Lee Youngjoo, a researcher at Hana Securities, stated, "It is difficult to interpret this as asset prices across the entire private credit market being shaken, but what matters is how quickly asset sales accelerate and whether this trend spreads to other funds."

The core issue in the recent private credit market is the increase in redemptions from retail private credit funds. The most notable case is Blue Owl's unlisted BDC, OBDC II. Retail private credit funds typically allow redemptions up to about 5% of NAV per quarter. The problem is that most of the investment assets are direct loans to mid-sized companies. Because such loan assets are difficult to sell immediately in the open market, a surge in redemption requests forces the fund manager to sell assets to raise cash.

Blue Owl responded by ending its existing quarterly redemption structure and instead offered investors redemptions of about 30% of NAV within 45 days. To secure cash for this, Blue Owl sold a total of USD 1.4 billion in loan assets from three BDCs: OBDC, OBDC II, and OTIC. The sale price was about 99.7% of the face value. While the scale itself was not enough to shake the entire market, the incident significantly heightened market attention on the true liquidity of private credit assets.

After this incident, the market's focus shifted to the reliability of NAV calculations. The NAV of private credit funds is typically a book value derived from internal valuation models. Since it does not reflect actual market transaction prices, there has always been debate on this issue. In this context, some credit hedge funds proposed a public tender offer for Blue Owl's unlisted BDC shares at a discount of about 20% to 35% to NAV, further raising questions in the market. This led to a "price discovery" movement among investors, who sought to verify the gap between book value and actual transaction price.

As redemption pressure mounted, fund managers adopted different response strategies. At Blackstone's retail private credit fund, redemption requests rose to about 7% to 8%, but the company responded by using employee capital to directly purchase some of the redemption volume. This approach absorbed redemption demand with internal funds, rather than rapidly selling assets and risking NAV impairment. In contrast, at BlackRock's HLEND, when redemption requests increased to about 9.3%, the fund manager followed fund rules and limited quarterly redemptions to the 5% cap. Thus, different management strategies emerged even under similar market conditions.

Listed BDCs Reflect Anxiety Through Stock Price Discounts

The instability of retail private credit funds is also affecting listed BDCs. Unlike retail private credit funds, listed BDCs do not accept redemption requests; instead, investors recover their capital by trading shares on the stock exchange. As one investor sells shares and another buys them, the fund's assets themselves do not decrease. However, market anxiety is reflected in the widening discount of share price to NAV.

This does not necessarily mean that the growth potential of the private credit industry itself has weakened. Researcher Lee commented, "For the past 20 years, the private credit market has played an important role in supplying capital to U.S. mid-sized companies. It was also a key source of funding during the post-pandemic growth of the software industry, and recently, demand continues with investments in AI infrastructure and data centers."

However, the market environment is becoming more challenging than before. Some asset managers have seen downward adjustments in asset values within their portfolios, and when the proportion of loans to software companies is high, the gap between growth expectations and actual cash flow has become more pronounced. In addition, falling interest rates and intensified competition are making the earnings environment for BDCs more difficult than in the past.

Ultimately, going forward, portfolio strategy and asset management capabilities will become key differentiators among private credit fund managers. Researcher Lee said, "As the private credit business structure, which has rapidly expanded without major corrections, now enters a phase of real market validation, we are seeing a period where outcomes differ depending on the manager and portfolio strategy, even within the same private credit space."

This content was produced with the assistance of AI translation services.