Original author: Ye Zhen

Original source: Wall Street Journal

The U.S. private credit industry is facing a dual pressure of liquidity contraction and asset revaluation. With investors rushing to withdraw funds and large financial institutions on Wall Street tightening credit, this massive $1.8 trillion market is on the brink of collapse.

According to the Financial Times, private credit giant Cliffwater and Morgan Stanley have recently implemented redemption restrictions on their multi-billion dollar funds. In the first quarter, these semi-liquid funds encountered a surge in withdrawal requests, and the scale of outflows forced management to trigger "gates" to avoid forced liquidation of the underlying illiquid assets.

While under pressure on the funding side, private credit institutions also faced tightening from large banks on the financing side. JPMorgan recently notified related institutions to reduce the collateral value of certain software loans in their investment portfolios. Although this action did not immediately trigger a margin call, it directly reduced the amount of financing available for relevant funds in the future, marking a comprehensive reassessment by traditional banking systems of their risk exposure in this sector.

The core of this dual pressure lies in the net asset value (NAV) arbitrage logic. As the value of related assets in the public market plummets, private credit institutions have failed to promptly adjust the valuations of their holdings, prompting investors to rush to cash out at book values above market fair value. This chain reaction, similar to a bank run, not only exacerbated the liquidity pressure on the funds but also forced the market to reassess the true pricing of private credit assets.

（Private credit company stock prices continue to decline）

Redemption wave spreads, semi-liquid funds face major tests

According to the Financial Times, Cliffwater restricted redemptions of its $33 billion flagship fund (CCLFX) in the first quarter. The fund received redemption requests accounting for 14% of total shares, ultimately approving only about half and repurchasing 7% of the shares.

Just hours after Cliffwater took action, Morgan Stanley also notified its $7.6 billion North Haven Private Income Fund investors that withdrawals would be restricted. Redemption requests for this fund surged to 10.9% in the first quarter, but only 45.8% of these requests were ultimately met.

In recent months, this trend has spread across the industry. HPS recently set a redemption limit of 5% for its flagship fund aimed at high net worth clients. Blackstone's Bcred fund fully paid out after redemption requests reached 7.9% of net assets, while Blue Owl and Ares previously satisfied higher redemption requests, although Blue Owl has since implemented permanent redemption limitations on another fund this year.

Cliffwater raised $16.5 billion last year, growing at a pace comparable to industry giant KKR. However, this model, relying on independent brokers to manage retail funds, makes it more vulnerable in the face of market sentiment fluctuations.

In response to the situation, the report states that Cliffwater is raising $1 billion by selling loan portfolios and expects to attract $3 billion in new commitments this quarter to offset outflows. The company emphasized in a letter to investors that the fund generated an 8.9% return in 2025, and its net leverage ratio is only 0.23 times, far lower than most similar instruments.

This capital outflow highlights the risks faced by several new semi-liquid funds that were initially promoted as a way to invest in private credit, but due to their underlying assets that trade infrequently, can only occasionally provide selling opportunities.

Overvaluation triggers arbitrage, highlighting the risk of a bank run

The core driving force behind investors rushing to withdraw funds is net asset value arbitrage.

According to a Bloomberg column analysis, software stocks and related debt in the public market have significantly dropped this year, but private credit institutions tend to hold loans to maturity and have not simultaneously adjusted their portfolio valuations downward.

This lagging pricing creates arbitrage opportunities. If a fund claims its loan is worth $100, while investors believe its actual market value is only $98, investors will attempt to redeem at the book value of $100.

This operational logic triggers a dynamic similar to a bank run: if a fund pays out at $100, the asset value of remaining investors will be further diluted, prompting more people to join the redemption queue. This puts immense pressure on interval funds that promise some liquidity when facing investors.

To alleviate concerns about valuation opacity, some institutions are attempting to increase transparency. John Zito, co-president of Apollo Global Management's asset management division, stated that the company is preparing to begin monthly reports of its credit fund's net asset values, with the ultimate goal of achieving daily net asset value reporting and introducing third-party valuations.

JPMorgan takes proactive measures, tightens leveraged financing

As internal capital drains away, private institutions' external sources of leverage are also being tested. According to the Financial Times, JPMorgan has proactively lowered the valuations of certain corporate loans in private institutions' portfolios, which are mainly concentrated in the software sector considered particularly vulnerable during the AI impact.

JPMorgan has a special clause in its private credit financing business that reserves the right to revalue assets at any time, while most other banks usually wait for triggering conditions like interest defaults before taking action. Media analysis indicates that this move aims to compress the available credit limits for these funds in advance, allowing for timely action when necessary, rather than waiting until a crisis occurs.

This tightening action had long been anticipated. JPMorgan CEO Jamie Dimon has previously expressed a cautious stance on the private credit sector multiple times. The bank's executive Troy Rohrbaugh indicated in February that JPMorgan is becoming more conservative regarding private credit risks compared to its peers. A fund manager also confirmed that JPMorgan has been "noticeably tougher" in providing backend leverage over the past three months.

Industry expansion logic undermined, subsequent risks remain uncertain

The rapid expansion of the private credit industry heavily relies on leveraged financing provided by regulated banks. Since the end of 2020, private institutions have raised hundreds of billions of dollars, quickly gaining the capacity to compete directly with banks for large-scale leveraged buyout financing.

However, a substantial amount of underlying assets originated during the home working boom period when software company valuations were soaring. As corporate cash flow expectations are revised downward, relevant debts will gradually mature over the next few years, and the market environment at that time will be vastly different from when they were issued.

Currently, private credit institutions insist that enterprise software companies are still growing and expect loans to continue to perform normally. Although no other banks have yet clearly followed JPMorgan's tightening stance, as major banks take the lead in reassessing asset values and retail redemption pressures remain high, the market's scrutiny of liquidity and valuation transparency in this industry is likely to continue to intensify.

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