“It works until it doesn’t, and it stops working precisely when investors most want out,” said Federico Basile, founder of Capital-Hill Securities. Private credit funds sold to wealthy and retail investors promised quarterly liquidity, yet redemption requests in the third quarter of 2026 ran two to eight times the 5% caps, leaving capital trapped in five-year corporate loans that cannot be sold quickly.
Global Finance Magazine reported that investors asked to pull between 10% and 16% of shares from several flagship private credit funds in a single quarter, driven by concerns over rising defaults, diminished deal activity, and opaque valuations of loans that never trade. The mismatch between promised access and actual liquidity is now testing an asset class that has grown to depend on continuous new inflows to meet redemption requests.
Three Figures That Explain the Exit Crunch
- Blue Owl Capital’s OTIC fund saw redemption requests reach nearly 39% of shares—almost eight times its 5% quarterly cap.
- Morgan Stanley’s North Haven Private Income Fund faced 11.4% redemption requests in Q3 2026, barely changed from 11.6% in the prior quarter, per SEC filings.
- Every major fund capped repurchases at 5%, meaning investors seeking to exit received only a fraction of their requested withdrawals.
Why 39% of Blue Owl’s Tech Fund Wants Out
At Blue Owl Capital’s technology-focused OTIC fund, redemption requests have held near 39% of shares, nearly eight times the 5% cap. The pressure stems from concerns that artificial intelligence could erode the software companies to which the fund lends. Blue Owl co-CEO Marc Lipschultz characterized the outflows on the firm’s April earnings call as “a headline-driven, not fundamental-driven, redemption environment.” Critics disagree. Lakshmi Ganapathi, founder of Unicus Research, warned that new investors are effectively paying off earlier redemptions in a dynamic she likened to Japan’s “extend and pretend” banking crisis of the 1990s, with loan books running through multiple nested shell companies so intertwined that “nobody knows where anything ends.”
The 5% Cap That Isn’t Liquidity
The numbers show this. Private credit funds make multi-year loans to companies that cannot be sold quickly, so lenders cap withdrawals at 5% per quarter as a safeguard. That safeguard is now breaking down. During the third quarter, redemption requests at Morgan Stanley’s North Haven Private Income Fund totaled 11.4% of shares, nearly matching the 11.6% recorded in the previous quarter. At Blackstone Inc.’s flagship BCRED fund, requests reached roughly 10%. At Cliffwater LLC’s flagship fund, they hit about 16%. Each fund capped repurchases at 5%.
Basile put it plainly: “A quarterly cap on a portfolio of five-year private loans is not a liquidity feature. It is an acknowledgment that the asset has none.”
Redemption Requests vs. the 5% Cap in Q3 2026
| Fund | Q3 Requests (% of shares) | Multiple of 5% Cap |
|---|---|---|
| Cliffwater Corporate Lending Fund | ~16% | ~3.2x |
| Apollo Debt Solutions (ADS) | 14.7% | ~2.9x |
| HPS Corporate Lending Fund (HLEND) | 11.5% | ~2.3x |
| Morgan Stanley North Haven Private Income Fund | 11.4% | ~2.3x |
| Blackstone BCRED | ~10% | ~2x |
Experts Warn Retail Investors About Private Credit Risks
Lakshmi Ganapathi says everyday investors are walking into a mismatch they are poorly equipped to handle. “Retail investors should not be anywhere close to anything that has to do with the private credit,” she said. They are being sold quarterly exits on “an asset that does not trade.” Big brand names in sales materials hold sway, she argued, so when Blackstone tells potential customers the market “looks nothing like 2008,” a retail investor may conclude the worries are so-called “fake news.”
Kimberly Flynn, president of XA Investments, flagged the growing use of payment-in-kind (PIK) income, where borrowers pay interest with additional debt rather than cash. “The growing amount of PIK in direct lending is a source of concern for companies that are not current pay and has implications for valuation,” she said. Should a fund overvalue its loans, early redeemers receive more than their holdings are actually worth, while remaining investors absorb the shortfall. “If the investor believes that valuations are too high today, they may want to sell before valuations decline or portfolios become impaired,” Flynn said.
Regulation Without Enforcement
Ganapathi disputes claims that the industry is adequately regulated. “Is regulation there? Yes, but is enforcement there? No,” she said. “Regulation is not equivalent to enforcement.” She also questioned whether banks understand the risk of the money they lend to private credit funds. Tarek Omar, CEO of Royce Stone Capital, defended the structure, noting that private credit is “capital that is allowed to be inconvenienced, providing it is adequately rewarded for its patience.” The 5% cap, he added, is communal: “That’s a shared cap, not an allowance each of us gets to use.”
Redemption Wave Expected to Build Through 2027
Ganapathi warned that pressure will likely intensify: “We expect the redemption wave to pick up speed” in 2027. Omar noted that deteriorating collateral can reduce what a fund may borrow, leaving less money available to meet withdrawals. For everyday investors, the test remains simple: deciding how long they can leave the capital there.
“If I thought a write-down was coming, why would I wait for it?” Omar asked.
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.
