It was a glorious time to make money. From early summer 2023 to the close of January 2025, private equity stocks staged what may rank as the single biggest surge, over a tight time frame, in the annals of financial services. In that eighteen month span, Blackstone notched total returns 58.2%, Ares, Apollo, and Blue Owl achieved 68.1%, 77.9%, and 80.6% respectively, and KKR led the charge at 103.4%. Then the cyclone came. Starting in September of last year, an historic selloff that from their peaks sent down Apollo 41%, Blackstone 46%, and Ares and KKR 48% each, while Blue Owl dropped by two thirds. The wipeout has erased over $265 billion in market cap; Blackstone and Blue Owl are now trading far below their levels of late 2021, and the sudden drop left KKR, Apollo and Ares showing puny, market-trailing gains over that near half-decade.
To be sure, the PE business has suffered from overpaying for its buyout picks in the period of ultra-low interest rates, a problem that’s forcing them to hold their portfolio companies for extended periods, and curtailed profits when they’re sold. But until recently, it was the tremendous growth in private debt that far more than offset the slump in their traditional franchise, and accounted for the wondrous performance of their stocks. Now, panic is roiling the funds holding loans to software outfits perceived to be threatened by AI, and investors, especially newly-recruited retail folk, are demanding their money back. “It resembles a run on a bank,” says Matt Swain, co-head of Equity Capital Solutions at investment bank Houlihan Lokey.
The problem is that the regular folk drawn to these funds high yields, in many cases, are proving far less patient than the super-long term holders that are the traditional pillars of private credit. Now enough of those newcomers are seeking large redemptions that it’s causing major distress at the PE world’s biggest and most profitable funds. The demands are so big that in many cases, the industry’s giants are shutting the gates, further raising worries and spurring the hunger to flee.
So how did things go south so quickly? And, can anything stem the bleeding? As always on Wall Street when someone is selling, someone else is buying at the right price—and some think that so-called “secondary” funds will be the winners here. “These deals may make a lot of sense for the secondary funds,” says David Feirstein, founder and managing partner at Ronin Capital Partners, a major New York PE firm. “The best opportunities are in markets where people get a little scared.”
Blackstone, KKR, Apollo are gating the exits—and retail investors are trapped inside
In the past, PE investors were mainly large institutions that garnered high interest payments for allowing their money to be tied up for, say, 8 or 10 years. But three or four years ago, the PE titans saw high net worth and middle class investors as a huge potential market for these products, and succeeded in attracting immense inflows from the retail realm. For example, Blue Owl garnered around 40% of its over $300 billion in assets under management from individuals. The whole idea, as Morgan Stanley states on their website, was to “democratize” the market by giving average people access to the same products as say, pension funds or multi-billionaires. The appeal was obvious: the Blackstone Private Credit Fund (BCRED) has delivered annual returns of 9.8% since its inception.
This new category became known as “semi-liquid” vehicles. They come in a number of flavors. Among them a type of Business Development Companies or BDCs that don’t trade on an exchange. Instead, investors can make requests to redeem all or part of their shares, but the PE managers typically cap total withdrawals per quarter at a fixed percentage of their net asset value, often 5%. Hence the term “semi-liquid.” According to Morningstar, semi-liquids became one of the hottest financial products on the planet, surging from AUM of just $200 billion at the start of 2022 to $500 billion in Q3 of last year.
The trouble began in September of last year via the back-to-back bankruptcies of two companies fueled by loads of cheap debt, much of it held by PE funds, subprime auto lender Tricolor, and car-part-maker First Brands. Then, the fear that AI could render swaths of the software trade outmoded moved a wave of the savings-for-retirement crowd to demand their money back.
First hit was the biggest retail shop, Blue Owl. In November, the firm restricted withdrawals, and in February bought back 15% of the outstanding shares in one fund to refund cash, and in another vehicle, ended its regular quarterly liquidity payments. At Blackstone’s BCRED, investors sought to pull out $3.8 billion or 7.9% of the assets. The firm took the extraordinary step of raising $400 million from its own capital and its senior executives to satisfy all the requests. Then the trouble began to spread from beyond the PE world to a variety of fund managers, including some of the world’s biggest names. Shareholders in alternative asset manager Cliffwater’s $33 billion flagship private credit fund are seeking to withdraw 7% of their stake. In early March, BlackRock restricted withdrawals on its $26 billion HPS Lending Fund. Morgan Stanley got repurchase requests for 10.9% of the shares in its North Haven Private Income fund. It returned $169 million in investor money, capping the payouts at 5%. In Canada, where around $30 billion invested in private real estate funds, about 40% of the total, is now gated as managers limit distributions and halt redemptions.
When J.P. Morgan said it would restrict its lending to the private debt funds, it had the feel that the longtime CEO was exactly right when he warned that when “cockroaches” like the September bankruptcies surface, more cockroaches are likely lurking nearby.
The plunging market for private investments might have an unlikely savior
These semi-liquid funds didn’t lend to the giants of the tech world like the Oracles and Intels. Instead, they parked a lot of their investor cash with mid-sized software companies, a debt category that looked like a great risk until late last year. One aspect that may have augmented the funds’ difficulties. It’s long been common for funds to hold around 10% of their assets in cash, usually in short-term treasuries, to fund redemptions. But industry sources told me that in some cases, managers found those super-safe cushions an unnecessary drag on their returns, since loads of money was pouring in, and only a trickle leaving. So they placed the “reserves” in syndicated debt that showed better yield. The problem: Those pools also included lots of software bonds that were dropping in value. Hence, when the funds sold those bonds to raise cash, they got far less than the 100 cents on the dollar that they invested. That shortfall may have tightened the liquidity available to meet redemptions.
In a recent interview, Jon Gray, Blackstone’s president and CEO, has argued persuasively that the withdrawal caps are “really a feature, not a bug, in these products. What you’re doing is trading away a bit of liquidity for higher returns. That’s the same tradeoff institutional investors have made for a long period of time.” In fact, despite the software woes, these funds are highly diversified and so far, we’re seeing no signs that companies whose debt the fund owns are in danger of defaulting. In effect, Gray is arguing that the restrictions are in place to ensure the LPs get full value by holding their shares for a long period and pocket the premium, as opposed to selling early at a big discount.
Still, if swarms of retail investors who aren’t used to that tradeoff and get scared by the AI news sell en masse, the funds’ net asset values will keep dropping, even if they don’t deserve to based on actual credit performance.
Naturally, the PE firms dread dumping bonds way before they mature at fire-sale prices to meet the redemptions. That would hammer returns for the institutions and non-selling small shareholders that remain. Now, an industry that’s grown rapidly of late is poised to step in as buyers, at a discount of course. They’re what’s called “secondary funds” that traditionally buy stakes from limited partners that want to exit before the fund sells all its assets, and closes down. Though the secondary players have mostly specialized in equity shares, they’re also increasingly active in credit.
Secondaries divide into two parts. The first and best known simply purchase positions, one at a time, from people who want out early. The second are what’s known as “Continuation Vehicles.” Here’s how CVs work today. Say a PE firm has held Company X in its portfolio for a long time, and it’s done well, but some of the original investors have waited long enough, and want to cash out. The sponsor and most of the investors see a lot more value in holding and improving Company X and want to stay. So the sponsor recruits a new group to replace those who want to go. The concept has clicked big time. CVs are one of the fastest growing segments in financial services. The industry’s grown ten-fold over the past decade to $100 billion, and represents around one-fifth of all PE exits. So far, the model’s mostly been deployed in equity, but it work in credit as well. As in equities, a credit CV that purchases part of the shares in a private credit fund from those desiring to leave establishes a new separate fund, comprising the new buyout investors, that’s still managed by the PE firm that raised and ran the original pool.
That’s where players like Matt Swain at Houlihan Lokey come in. His company does a brisk business in raising money PE sponsors to purchase companies they can vastly improve, and also for CVs (you can read Fortune’s feature about him here.) He sees both regular secondaries and CVs as a solution to giving both sides what they need, the retail crowd a way out, and the fund managers a route towards providing them that option sans the forced dumping of bonds, and managing money for the new group comprising the CV.
“The CV investors are often a different breed from the people who want to get out,” Swain told Fortune in a recent interview. “They’re chiefly family offices, endowments, and foundations, sophisticated players who will want to stay in these deals. They’re also highly opportunistic, and they’ll seize the chance to purchase at discounts that generate superior returns in the long-term.” In other words, Swain thinks that it’s the support of CVs that could stabilize the market, reassure anxious limited partners that they’re not going to get locked in, and stem a descent into spiraling demands to flee.
Houlihan Lokey got into CVs early, and it’s a major fund-raiser for PE firms seeking candidates to replace the investors looking to leave. “CVs are the option that the market hasn’t priced in yet,” says Swain. “It’s what could prevent a big drop in the value of these funds. It will allow the LPs to take out 100% of their liquidity. If a firefighter wants to get their $25,000 out of the semi-liquid fund, they’ll be able to do it. The panic happens when people think the liquidity isn’t available.” He notes that the CV investors will still want good prices from the sellers. He believes that the skepticism around some of the software debt is legitimate, so shares could sell at a discount. Feirstein agrees that CVs could provide a good match for the funds where redemption requests are running high. “I think it would be of interest where you have a bunch of investors getting nervous about software credit, for example, and want out,” he says. “It could be a way solving some retail uncertainty.”
The big PE firms, notably Blackstone and Apollo, harbor their own “secondary” funds that purchase shares from investors that want to leave their and other funds early, before all companies in their portfolios are sold. These secondary pools also put new investors into continuation vehicles. These firms hasn’t announced any plans to participate in secondary purchases of private credit shares.
Fortune reached out to both Apollo and Blackstone for comment, but did not immediately receive an immediate response. However, the big firms are known for having excellent risk controls; their fundamental model consists of funding assets such as real estate projects, rail cars, aircraft and sundry other hard assets that produce durable cash flow, where the rents, leases and other income streams they’re collecting provide a wide cushion over the interest paid to their investors. Plus, the loans are generally secured by the underlying assets. So most of the sources I spoke to for this story said this is not a situation where they would expect to see a huge wave of defaults.
Besides the giants, a large group of private markets firms manage CV funds, and appear likely purchasers of shares from investors seeking redemptions. The list encompasses HarbourVest Capital, Coller Capital, Pantheon Ventures, all of the U.S., Tikehau Capital and Ardian.
One potential problem: Private credit is a $1.8 trillion domain. The secondary market totals around $200 billion, about evenly divided between equity and credit. If demands for paybacks really take off, it’s unclear that the secondary buying space is big enough to fully bolster and balance the market. Swain believes, however, that the investors will pour lots of new money into secondary funds as they see the good deals spread, giving them more capacity to help absorb the selling. Still, Swain already sees deals developing where CVs are purchasing surprisingly large portions of existing funds, in some cases replacing 85% or 90% of the existing investors.
But the CV investors are marathoners. Swain notes that many of those interested will be family offices that eschew investing in traditional PE funds where an Ares or Carlyle pick the companies. They’d much rather make the choices themselves by evaluating existing enterprises that already have a track record. These family offices will be examining packages of known assets, or perhaps even bonds in individual companies. That’s just the kind of individual, one-by-one deals they’re looking for.
And unlike many retail investors, they’re in it for the marathon, not just a sprint.
