Morgan Stanley and Cliffwater LLC caps withdrawals from their multibillion-dollar private credit funds

Morgan Stanley and Cliffwater LLC capped withdrawals from their multibillion-dollar private credit funds. This came to pass after investors attempted to redeem significantly more than the vehicles permitted.

After investors attempted to remove a record 14% of shares, Cliffwater's $33 billion flagship private credit vehicle restricted redemptions to 7% of shares in the first quarter. After limiting redemptions to 5% of shares, Morgan Stanley's North Haven Private Income Fund, which has about $8 billion in assets, returned just $169 million, or less than half of investors' tender demands.

The actions are among the most striking instances to date of private credit funds battling a surge of redemption demands in the face of mounting worries about the calibre of their loans, especially to software firms that are at risk from artificial intelligence.

BlackRock Inc. decided last week to restrict withdrawals, a decision that other managers have subsequently followed, although the majority of funds had tried to satisfy investor demands for cash.

Morgan Stanley and Cliffwater representatives declined to comment.

In the meantime, concerns over the value of its illiquid loans are putting more strain on the $1.8 trillion private lending market.

After lowering the value of some software-linked loans in its portfolios, JPMorgan Chase & Co. is limiting some lending to private credit funds. Although it only impacts a limited number of borrowers and hasn't yet resulted in any significant margin calls, the drop in those asset values will restrict how much the bank can lend to the funds.

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Regarding the surge in redemptions, private credit funds targeted at individual investors are usually obliged to provide quarterly share repurchases, but they are not designed to readily handle a rush for the exits.

According to Bloomberg News, in a statement signed by founder and CEO Stephen Nesbitt, Cliffwater stated that a payout of 7% was a "regulatory maximum". The letter's contents were verified by a firm representative.

Managers of the Cliffwater Corporate Lending Fund had been debating whether to cap redemptions at 5% or 7% since they expected redemptions to surpass the higher threshold.

Nesbitt informed investors in the letter that the Cliffwater fund's performance "remains strong." He emphasised a "historical track record of near zero per cent in realised losses" and an annualised return of roughly 9.4% since June 2019. According to the letter, the fund's liquidity is 21% of its net asset value.