Requests eased for nearly every fund Fitch Ratings tracks, but still averaged 9.8% of shares. Much of the demand is a backlog from investors paid out only in part earlier this year, while new money keeps shrinking.
The rush to leave perpetual private credit funds is slowing. The queue is not gone.
Of the 15 perpetually non-traded business development companies that Fitch Ratings follows and that reported third-quarter tender results, 13 received smaller redemption requests than in the second quarter. On average, investors sought to redeem 9.8% of shares. Six funds came in under the 5% quarterly limit they apply to repurchases, which left nine still rationing exits.
The spread between funds is enormous. Bain Capital Private Credit drew requests for just 0.2% of its shares. Blue Owl Technology Income Corp. drew 39.0%.
A backlog, not a new wave
Most of what remains above the cap is old demand, according to Fitch. Investors who were only partly paid out earlier in the year keep resubmitting. Two-thirds of the third-quarter requests at North Haven Private Income Fund came from that group. Ares Strategic Income Fund said its net new requests were 70% below the first quarter and 60% below the second, and amount to roughly 3% of net asset value.
The backlog is shrinking. North Haven and Ares each expect that, once third-quarter payments go out, investors will have received about 80% of the capital they first asked to withdraw. Apollo Debt Solutions BDC estimates about 75%, and says it should clear most of what is left by the end of the year.
Money in is still falling
Fundraising is the weaker half. Excluding reinvested dividends, new money ticked up in June and has slipped since; September's total was lower than May's, which had been the low point. Barings Private Credit Corp., Goldman Sachs Private Credit Corp. and Blue Owl Credit Income Corp. were the only funds to raise more in the third quarter than in the second.
Because of weaker fundraising at nine funds, net flows are still negative even with requests easing, and the agency expects it to take "several quarters" before the average request drops under 5%.
The cap as a shock absorber
The 5% ceiling exists so that exits wait in line instead of forcing funds to sell loans. Fitch said the funds it rates hold enough liquidity to pay out the maximum for several quarters. If repurchases ran above 5% for a sustained period, especially with inflows this soft, the agency said asset-coverage cushions and ratings could come under pressure.
The slowdown in fundraising comes as interest rates climb. The Federal Reserve raised its benchmark rate in September, and its officials have signaled at least one more increase this year.
Market implications
One reading is that the redemption wave has peaked. Requests fell at nearly every fund, most of the remainder is a backlog being worked down, and the largest managers say most original requests will soon be satisfied.
A second reading is that the funds have traded a liquidity problem for a growth problem. Nine of 15 are still capping exits, new money is below spring lows, and the product's appeal to individual investors rests on liquidity that remains rationed.
What to watch
Fourth-quarter tender results, monthly fundraising figures and any change to the 5% caps will show whether requests fall below the limit on the schedule Fitch expects. Ratings actions would follow if repurchases above 5% become routine.