Blackstone is latest to rattle private credit market

Blackstone, Inc.'s (BX) stock slid on Tuesday after the alternative investment giant said in a regulatory filing that it was allowing investors to redeem 7.9% of shares from its flagship private credit fund, equivalent to roughly $3.8 billion.

It's the latest sign of stress in the $1.8-trillion private credit market, which had become one of the hottest sectors in the alternative investment space in recent years. The firms have generated trillions in revenue by lending to largely risky companies, including many in the software sector.

But a market rout tied to investor concerns about AI disrupting many of the core business operations for companies in the software-as-a-service (SaaS) space has sent stocks in the sector tumbling. About 20% of loans made to software companies have come from private credit funds, which has led to increased scrutiny over the risks tied to this lending.

Blackstone said in its filing that it is meeting the withdrawal requests by increasing the size of a previously announced tender offer by 7% of the fund's total shares, and the firm and its employees will step in to offset the remaining 0.9%.

According to Sonali Basak, chief investment strategist for iCapital, Blackstone and its employees are pouring in $400 million to the feeder fund to help match the redemptions.

It is the largest withdrawal of shares ever from Blackstone's $83-billion private credit fund, which is known as BCRED.

“These investments were about meeting 100% of requests for the quarter with certainty and timeliness,” a Blackstone spokesperson told Bloomberg. “They underscore our conviction in BCRED and alignment with its investors.”

Blackstone's shares fell over 3% on Tuesday.

The firm's decision to meet client redemption requests was praised in a post on X by CNBC commentator Jim Cramer.

"They showed great honor in their redemption policy," he said

Cramer might've been taking a subtle dig at another big-name private capital firm that's been in the news.

The withdrawals from BCRED come after Blue Owl Capital (OWL), the world's largest private credit fund, announced last month that it was permanently halting withdrawals from its inaugural private retail debt fund, after having previously said that it would be opening redemptions at some point this quarter.

The firm said that investors in its Blue Owl Capital Corp II fund would no longer be permitted to make quarterly withdrawals, but that it would now return their capital in periodic payments as it begins selling down assets over the coming quarters and years.

The decision came after Blue Owl announced a $1.4 billion sale of credit assets across three of its funds, including $600 million from its private retail debt fund.

Retail investors could get burned

The move by Blue Owl immediately sparked concerns about a looming liquidity crunch across the markets, similar to what happened during the 2008-09 financial crisis.

Interestingly enough, private credit began to really grow in the wake of the 2008-09 financial crisis when regulators began tightening rules around lending for Wall Street banks as concerns over liquidity had become heightened.

But Blue Owl's struggles are also raising questions about the impact that risky investments like private credit can have on retail investors, especially those who put money into the Blue Owl Capital Corp II fund.

Lloyd Blankfein, the former CEO of Goldman Sachs, noted on Bloomberg's Big Take podcast that the government will always care much more when smaller investors start getting hurt in opaque markets like credit.

"The consequences of being wrong or having a problem in the account of retirees - i.e. real people, citizens, taxpayers, voters - is much more highly consequential," he said.

Blankfein said that the political sector "cares, but not that much, if institutional investors lose money" because they can afford it. The same is true for very high-net worth investors who also have the income to absorb any losses, he added.

"Undoubtedly we've put money in places where write-offs are going to have to happen," Blankfein said. "And when you're dealing with opaque, illiquid assets like credit, that's a place that one would clearly have to look."