[Why&Next]Will a "Fund Run" Happen?... Where Is the Private Credit Market Headed?

Redemption Requests for Private Credit Loan Funds Surge in the U.S.

Liquidity and Asset Mismatch Structure Limits Redemption Response

Some See "Growing Pains, Not a Crisis"... Limited Impact on Korea So Far

In the United States, redemption requests for private credit loan funds are increasing, raising concerns about a potential “fund run.” Some have even labeled this as a form of “shadow banking,” warning that it could trigger a structural credit crisis. However, there are also counterarguments that the sector is not yet at a dangerous stage. The prevailing view is that these are growing pains experienced by a rapidly expanding market, and that massive investments in the artificial intelligence (AI) industry—the primary source of demand—will inevitably continue.

Redemption Requests Surpass $10 Billion in Q1

According to major international media outlets and investment banking (IB) industry sources on March 18, redemption requests from private loan funds managed by major firms such as Blackstone, BlackRock, Cliffwater, and Morgan Stanley exceeded $10 billion (approximately 15 trillion won) in the first quarter of this year alone.

Redemption pressure had already been mounting rapidly since the end of last year. According to U.S. fintech company iCapital, the average redemption rate for unlisted BDCs (Business Development Companies) in the third quarter of last year was 1.6% of net asset value (NAV). By the fourth quarter of the same year, it had already surged to 4.8%, a level close to the typical fund redemption limit of 5%.

BDC refers to a type of public fund that diversifies more than half of its assets into unlisted venture companies. While REITs (Real Estate Investment Trusts) split real estate assets for investment and pay dividends, BDCs are similar in that they pay dividends from assets invested in loans to unlisted companies. The OBDC II fund from Blue Owl Capital, which recently triggered the private loan fund redemption crisis, is also an unlisted BDC.

Warnings have also been issued within the U.S. financial sector. In a recently published analysis, Morgan Stanley's research team stated that advances in AI technology are causing disruptive restructuring in the software industry, and predicted that the default rate for direct lending could reach 8%. Direct lending refers to private loan funds directly lending to small and mid-sized companies. The report expressed concern that high leverage within the software sector and the imminent “maturity wall” could push default rates to their highest levels since the COVID-19 pandemic. The report also highlighted that the stable, subscription-based revenue model of software companies could be undermined by AI developments, which could reduce collateral values.

John Zito, Co-President and Head of Credit at Apollo Global Management, a private debt specialist, also pointed out in a recent UBS client lecture that asset valuations for AI and software companies acquired by private equity fund managers are excessive. He warned that these companies could face future problems as they obtain private loans based on inaccurate asset values. However, he clarified, “This is not the collapse of the entire private credit market, but rather a phase where underperforming asset managers and assets are being filtered out,” signifying growing pains from rapid expansion. According to alternative investment market analysis firm Preqin, global private credit assets under management (AUM) grew from $1.2204 trillion (about 1,775 trillion won) in 2020 to an estimated $2.2801 trillion last year. The market is projected to expand to $4.504 trillion by 2030.

Liquidity Mismatch Could Lead to a Vicious Cycle

The structural limitations of private credit make it vulnerable to large-scale redemption requests. Because these funds invest in long-term, illiquid loan assets, there is an inherent structural mismatch between liquidity and assets that prevents immediate loan recovery upon redemption requests.

If a surge of redemption requests cannot be controlled, this can trigger a vicious cycle. By disposing of high-quality assets or loans that can be recovered first, the fund’s profitability and size shrink. As the quality of remaining assets deteriorates, the fund becomes more vulnerable to additional redemption pressure, thus perpetuating the cycle.

An IB industry official explained, “Both bank runs and fund runs fundamentally start from the fear that if you’re late, your investment may become worthless. In addition to the structural liquidity mismatch, the market is also vulnerable to shifts in sentiment.”

Blackstone’s recent response has been interpreted as an effort to block the spread of such anxiety. On March 3, redemption requests amounting to $3.8 billion were submitted to Blackstone’s private loan fund, corresponding to 7.9% of the fund’s total assets. Blackstone responded by raising the quarterly redemption limit from 5% to 7%, and by having the company and its management contribute an additional 0.9%. This move was intended to ease investor anxiety by increasing the redemption limit and to build trust by investing its own assets.

"Beware of Excessive Fear"

However, some in the market believe that the likelihood of this situation escalating into a financial crisis is limited. This is because private loan funds typically have quarterly redemption terms, making it structurally different from bank runs, where liquidity crises can emerge in a single day.

Some argue that the remarks by Jamie Dimon, CEO of JPMorgan Chase, which fueled market anxiety, should not be over-interpreted. Previously, CEO Dimon had warned about the private loan redemption situation, stating, “If you see one cockroach, there are probably more.” While this statement heightened concerns, many in the market view it less as a pure “warning” and more as a remark reflecting vested interests.

An executive at a foreign asset management firm operating in Korea stated, “The mid-market and leveraged buyout (LBO) finance sector, where private credit has expanded, were originally areas where banks were strong. If private credit contracts, the biggest beneficiaries will be banks. Just as during past financial crises, JPMorgan, the largest U.S. bank, will stand to benefit greatly by scooping up assets whose prices have fallen.”

Another domestic asset management CEO recalled, “When I met CEO Dimon in person and asked about macroeconomics, international affairs, and market conditions, he seemed very bored and left the meeting much earlier than scheduled. He bluntly said that, regardless of whether interest rates go up or down, he needs to make a profit, and that he’s not interested in any topic other than making money.”

Limited Domestic Impact... "No Damage to Fundamentals"

As domestic institutional investors have also expanded their overseas private credit investments, they are closely monitoring market developments. The Financial Supervisory Service held a meeting with major securities companies on March 4, urging them to strengthen their risk management. According to the FSS, the balance of overseas private credit fund products sold to domestic investors by 12 major securities firms increased from approximately 1.18 trillion won in November 2023 to 1.7 trillion won at the end of last year. Most domestic investors are pension funds, mutual aid associations, and corporations. The balance of individual investments grew about 3.2 times over the same period, from 115.4 billion won to 479.7 billion won.

However, the consensus is that the likelihood of a crisis spreading to Korea is low. An official from a mutual aid association commented, “Although issues such as double collateral loans by some U.S. firms have been highlighted, we do not believe that the fundamentals of loan assets have been impaired overall. We will continue to monitor the situation, but there is no need to consider interim redemption requests at this stage.”

The likelihood of a homegrown private credit crisis in Korea is extremely low. While some private equity fund managers have created private credit funds for corporate lending, these account for only a very small portion of total assets. Furthermore, BDCs, which have been problematic in the U.S., have not even been launched in the Korean market.

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