Redemption wave meets the loan withdrawal wave, the US private credit industry faces a "bank run storm"

Author: Ye Zhen

Source: Wall Street Insights

The U.S. private credit industry is facing a dual squeeze of liquidity contraction and asset revaluation. As investors rush to withdraw funds and major Wall Street financial institutions cut back on lending, this massive market worth $1.8 trillion is teetering on the edge.

According to the Financial Times, private credit giants Cliffwater and Morgan Stanley have recently imposed redemption restrictions on their billion-dollar funds. In the first quarter, these semi-liquid funds experienced a surge in withdrawal requests, forcing management to trigger gates to prevent underlying assets from being sold at a discount due to lack of liquidity.

While funding pressures mount, private credit lenders are also facing tightening from large banks. JPMorgan Chase recently notified relevant institutions that it has lowered the collateral value of some software loans in its investment portfolio. Although this did not immediately trigger margin calls, it directly reduced the future financing capacity of related funds, marking a comprehensive reassessment of the traditional banking sector’s risk exposure in this area.

This two-way squeeze centers on net asset value (NAV) arbitrage logic. As public market asset values plummet, private credit firms have not adjusted their holdings’ valuations accordingly, prompting investors to rush to cash out at prices above fair market value. This chain reaction, similar to a bank run, not only intensifies liquidity pressures on funds but also forces the market to reevaluate the true pricing of private credit assets.

(Private credit company stock prices continue to decline)

Redemption wave spreads, semi-liquid funds face a major test

The Financial Times reports that Cliffwater restricted redemptions for its $33 billion flagship fund (CCLFX) in Q1. The fund received redemption requests representing 14% of total shares, of which only about half were approved, repurchasing 7%.

Just hours after Cliffwater’s move, Morgan Stanley also notified investors in its $7.6 billion North Haven Private Income Fund that withdrawals would be limited. Redemption requests in Q1 surged to 10.9%, with only 45.8% of the requested amount fulfilled.

In recent months, this trend has spread across the industry. HPS recently set a redemption cap of 5% for its flagship high-net-worth client fund. Blackstone’s Bcred fund fully redeemed after redemption requests reached 7.9% of NAV, and Blue Owl and Ares previously met high redemption demands, although Blue Owl has implemented a permanent redemption restriction on another fund earlier this year.

Last year, Cliffwater raised $16.5 billion, growing at a pace comparable to industry giant KKR. However, this reliance on independent brokers managing retail investor funds makes it more vulnerable to market sentiment swings.

To address 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 investor letters that the fund generated an 8.9% return in 2025, with a net leverage ratio of only 0.23x, well below most similar instruments.

This capital outflow highlights the risks faced by many new semi-liquid funds, which were marketed as a way to invest in private credit but hold assets that are rarely traded, offering only occasional exit opportunities.

Overvaluation triggers arbitrage, run risk becomes evident

The core driver of investor withdrawals is NAV arbitrage.

According to a Bloomberg column analysis, publicly traded software stocks and related debt have fallen sharply this year, but private credit firms tend to hold loans to maturity without adjusting their portfolio valuations accordingly.

This lag in pricing creates arbitrage opportunities. If a fund claims its loans are worth $100, but investors believe their actual market value is only $98, they may attempt to redeem at the $100 book value.

This logic triggers a bank-run-like dynamic: if the fund pays out at $100, the remaining investors’ assets are further diluted, prompting more to redeem. This increases pressure on interval funds that promise partial liquidity when facing investor redemptions.

To ease concerns over opaque valuations, some firms are trying to increase transparency. John Zito, Co-President of Apollo Global Management’s asset management division, said the company is preparing to start reporting net asset values monthly, with the ultimate goal of daily NAV reporting and third-party valuation.

JPMorgan Chase takes proactive steps to tighten leverage financing

Amid internal capital outflows, external leverage sources for private firms are also under pressure. According to the Financial Times, JPMorgan Chase has proactively lowered the valuation of some corporate loans in private portfolios, mainly those in the software sector deemed vulnerable under AI disruption.

JPMorgan has a special clause in its private credit financing business that allows it to revalue assets at any time, unlike most other banks that typically act only upon defaults or trigger events. Analysts suggest this move aims to preemptively reduce credit limits to these funds, enabling timely action if needed, rather than waiting for a crisis.

This tightening was anticipated. JPMorgan CEO Jamie Dimon has publicly expressed cautious views on private credit multiple times. Troy Rohrbaugh, a senior executive, stated in February that JPMorgan is becoming more conservative regarding private credit risks compared to peers. A fund manager confirmed that JPMorgan has been “significantly more aggressive” in providing backend leverage over the past three months.

Industry expansion model faces challenges, future risks uncertain

The rapid growth of private credit heavily depends on leverage financing from regulated banks. Since late 2020, private firms have raised hundreds of billions of dollars, quickly gaining the capacity to compete directly with banks in large leveraged buyouts.

However, many underlying assets were created during the high-valuation boom of software companies amid the remote work surge. As cash flow expectations are revised downward, these debts will mature over the coming years, in a market environment very different from the time of issuance.

Currently, private credit firms insist that software companies are still growing and that loans will continue to perform normally. Although no other banks have yet followed JPMorgan’s tightening stance, the market’s scrutiny of liquidity and valuation transparency is expected to intensify as major banks reassess asset values and retail redemption pressures remain high.