"Betrayal of the 'Golden Goose': Investors Panic Over Frozen Funds, Wonder 'Should I Pull Out Now?' [Global Focus]"

US Stock Market Shaken by Widening Redemption Restrictions
"Private Credit a Bigger Threat Than Iran War"

Private credit, once called a "prime asset" and the "goose that lays golden eggs," has emerged as a ticking time bomb that could trigger a second financial crisis. Getty Images

Private credit, once regarded as a "prime asset" and a "golden goose," has now emerged as a ticking time bomb with the potential to trigger a second financial crisis. As the advancement of artificial intelligence (AI) has cast a shadow over the software industry, the private credit market—which has been a key source of funding for this sector—has come under growing scrutiny. Experts warn that this crisis could escalate beyond a mere liquidity issue in the private credit market and lead to capital outflows across all asset classes.

Private Credit Redemption Restrictions Spread...Is the Systemic Risk Escalating?

Currently, financial circles in the United States are warning that suspension of redemptions in private credit funds could spark a liquidity crisis in the private credit market. Mohamed El-Erian, Chief Economic Advisor at Allianz, told Business Insider (BI) that the recent developments surrounding private credit represent a "textbook case of contagion."

What he fears most is the realization of the "ATM scenario." This scenario describes a situation in which redemptions are restricted for illiquid assets such as private credit products, resulting in investors' funds being locked up. Investors then sell healthier assets to secure liquidity, which can cause liquidity stress to spread from the private credit market to other asset classes.

He warned, "Investors may be forced to liquidate other relatively healthy funds to secure cash," adding, "Even if those funds have solid fundamentals or belong to entirely different asset classes, they could be used as sources of liquidity."

This kind of contagion has already materialized in the past. In the summer of 2007, BNP Paribas froze some of its securitized bond funds, prompting other Wall Street funds to follow suit, which eventually led to a liquidity crisis. The following year, the collapse of Lehman Brothers and Bear Stearns triggered the global financial crisis.

International media outlets are highlighting that the current situation in the private credit market is not just growing pains but an exposure of structural vulnerabilities. The market now faces multiple challenges, including increased uncertainty over mergers and acquisitions (M&A), concerns about credit deterioration, and declining asset yields.

However, some believe that these concerns are overstated. Jane Fraser, CEO of Citigroup, recently stated that while there are some issues in the private credit market, she does not believe they pose a systemic risk.

On the contrary, there are also projections that the private credit market will continue to grow. BNP Paribas recently announced a plan to double its asset management revenue by 2030, citing alternative assets—including private credit—as a key growth driver. The bank also characterized recent defaults as cases mainly concentrated in the United States and expressed a positive outlook on future growth potential.

AI-Fueled 'SaaSpocalypse' Heightens Concerns in Private Credit Market

The instability in the private credit market has been exacerbated by the proliferation of AI. When OpenAI's ChatGPT was first introduced, there were high expectations that AI would boost software productivity. However, as concerns grew over AI potentially replacing some software functions, the sentiment shifted.

This year, with companies such as Anthropic launching AI agents, market anxiety has intensified. There are growing fears that the evolution of AI agents could undermine existing Software-as-a-Service (SaaS) business models and revenue structures. This has even led to the coining of the term "SaaSpocalypse."

The software companies targeted by the SaaSpocalypse have received significant funding from the private credit market. Software firms can generate stable, recurring revenue through subscription fees once they acquire customers, which is advantageous for lenders seeking steady interest payments. As a result, funding has become heavily concentrated in this sector.

According to PitchBook, the software sector accounted for approximately 18% of all U.S. private equity investments last year, surpassing the 10-year average of 14%. Credit rating agency KBRA reports that software companies make up about 17% of all borrowers in the private credit market, representing approximately 22% of more than $1 trillion in total debt. In some investment areas, this proportion has risen to as much as 30%. Jim Zelter, President of Apollo, stated in last month's earnings release that over the past decade, about 30% of private equity investments have gone into the software industry, and that the software share in the private credit market now reaches around 40%.

The SaaSpocalypse has proven to be more than just a forecast. As concerns over AI have caused software company stocks to plummet, investor sentiment toward these assets has weakened. Consequently, there has been a surge in redemption requests, particularly from private credit funds. Blue Owl Capital, a U.S. private credit investment firm, announced it would suspend fund redemptions due to a flood of redemption requests. Last month, Blue Owl decided to permanently halt regular redemptions for its retail investor fund, Blue Owl Capital Corp II, opting instead to return proceeds intermittently as assets are sold. This means regular redemptions for the fund are now permanently discontinued.

Subsequently, other major asset managers also imposed withdrawal restrictions. The North Haven Private Income Fund (PIF) managed by Morgan Stanley paid out only about 45.8% of requested redemption amounts ($169 million) due to a surge in redemption requests. BlackRock also imposed withdrawal limits on its HLEND fund in response to a spike in redemption applications. Other managers such as Blackstone and Cliffwater took similar actions, restricting redemptions or reducing payout amounts.

The Financial Times (FT) estimates that redemption requests submitted to private credit funds managed by global asset managers—including BlackRock, Blackstone, Cliffwater, and Morgan Stanley—amounted to approximately $10.1 billion in the first quarter.

Some analysts believe that the scale of distress could be even larger. According to Bloomberg, many companies that have received loans from private equity funds operate in the software sector, but are often not classified as such. Bloomberg also pointed out that private credit is an opaque industry due to inconsistent reporting standards, complex fee structures, and significant discretion in valuation.

Warning signs for a crisis in private credit began to emerge last year. In September, subprime auto lender Tricolor Holdings filed for bankruptcy, followed by auto parts manufacturer First Brands, which also filed for court receivership. These events heightened market concerns, as both companies had raised funds through private credit. With high interest rates, the number of companies struggling under the burden of interest payments has increased, and borrowers' repayment capabilities have deteriorated rapidly. Commenting on this situation last October, Jamie Dimon, Chairman and CEO of JPMorgan Chase, warned, "If you see one cockroach, there are likely to be more," hinting at the potential for further defaults.

◆Term Explanation: Private credit refers to loans made directly to companies by asset management firms, pension funds, or private equity funds, rather than by banks. These loans are typically provided to small and mid-sized companies or to firms involved in leveraged buyouts that find it difficult to obtain bank loans or issue corporate bonds. Interest rates are usually higher than those of banks, and requirements for collateral or financial covenants are often more relaxed. Private credit gained prominence after the 2008 global financial crisis, as stricter capital regulations led banks to retreat from higher-risk corporate lending, resulting in rapid growth for the market.

The global private credit market grew from $550 billion in 2015 to $1.8 trillion in 2024, and is now estimated to be close to $2 trillion. The reason private credit has been called a prime asset is simple: most private credit loans have floating rates, so interest income rises significantly during periods of increasing rates. As global rate hikes have continued, returns have naturally increased. In addition, the prevalence of senior secured loans backed by collateral has reinforced perceptions of asset stability.

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