Investors rush to flee, banks drastically cut credit, the U.S. private credit industry faces a "run on the bank" storm

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 tighten credit, this massive market, valued at $1.8 trillion, is on the brink of collapse.

According to the Financial Times, private credit giants Cliffwater and Morgan Stanley have recently implemented redemption restrictions on their multi-billion dollar funds. In the first quarter, these semi-liquid funds experienced a surge in withdrawal requests, and the scale of capital outflows forced management to trigger "gates" to avoid the undervalued sale of illiquid underlying assets.

While facing pressure on the funding side, private credit institutions are also encountering tightening from large banks on the financing side. JPMorgan Chase has recently notified relevant institutions to lower the collateral value of certain software loans in its investment portfolio. Although this move did not immediately trigger margin calls, it directly reduced the financing scale available to related funds, marking a comprehensive reassessment of the traditional banking system's risk exposure in this sector.

The core of this dual squeeze lies in the net asset value (NAV) arbitrage logic. As the value of related assets in the public market plummets, private credit institutions have failed to adjust their holding valuations in sync, prompting investors to rush to cash out at book prices above the market fair value. This chain reaction, similar to a bank run, not only exacerbates the liquidity pressure on funds but also forces the market to reassess the true pricing of private credit assets.

(Private credit company stock prices continue to decline)

Redemption wave spreads, semi-liquid funds face major tests

According to the Financial Times, Cliffwater restricted redemptions for its $33 billion flagship fund (CCLFX) in the first quarter. The fund received redemption requests amounting to 14% of total shares, ultimately approving only about half and repurchasing 7% of the shares.

Just hours after Cliffwater took action, Morgan Stanley also notified investors in its $7.6 billion North Haven Private Income Fund that withdrawals would be limited. The fund's redemption requests surged to 10.9% in the first quarter, ultimately fulfilling only 45.8% of those requests.

In recent months, this trend has spread across the industry. HPS recently set a redemption cap of 5% for its flagship fund aimed at high-net-worth clients. Blackstone's Bcred fund fully redeemed after withdrawal requests reached 7.9% of net assets, while Blue Owl and Ares previously met higher redemption requests, although Blue Owl has implemented a permanent redemption restriction on another fund this year.

Cliffwater raised $16.5 billion last year, expanding its scale at a pace comparable to industry giant KKR. However, this model, which relies on independent brokers to manage retail funds, makes it more vulnerable in the face of market sentiment fluctuations 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 capital outflows. The company emphasized in a letter to investors that the fund generated an 8.9% return in 2025, with a net leverage ratio of only 0.23 times, far lower than most similar instruments.

This capital outflow highlights the risks faced by many new semi-liquid funds, which were initially marketed as a way to invest in private credit but can only occasionally provide selling opportunities due to the infrequent trading of their underlying assets.

Overvaluation Triggers Arbitrage, Exposing Redemption Risks

The core driver behind investors rushing to withdraw funds is the arbitrage of net asset value.

According to an analysis by a Bloomberg column, software stocks and related debt in the public market have significantly declined this year, but private credit institutions tend to hold loans to maturity and have not adjusted 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, investors will attempt to redeem at the book value of $100.

This operational logic triggers a dynamic similar to a bank run: if the fund redeems at $100, the asset value for remaining investors will be further diluted, prompting more people to join the redemption queue. This puts immense pressure on interval funds that promise some liquidity when facing investors.

To alleviate external concerns about valuation transparency, some institutions are attempting to increase transparency. John Zito, co-president of Apollo Global Management's asset management division, stated that the company is preparing to start reporting the net asset value of its credit funds monthly, with the ultimate goal of achieving daily net asset value reporting and introducing third-party valuations.

JP Morgan Takes Proactive Measures, Tightens Leverage Financing

Amid internal capital outflows, the external leverage sources for private equity firms are also under scrutiny. According to the Financial Times, JP Morgan has proactively lowered the valuations of certain corporate loans in private equity portfolios, primarily concentrated in the software industry, which is considered particularly vulnerable to the impact of artificial intelligence.

JP Morgan has a special clause in its private credit financing business that reserves the right to revalue assets at any time, while most other banks typically wait for triggering conditions such as interest defaults to take action. Media analysis indicates that this move aims to preemptively tighten the available credit limits for these funds, allowing timely action when necessary rather than waiting for a crisis to unfold.

This tightening action has long been anticipated. JP Morgan CEO Jamie Dimon has previously expressed a cautious stance on the private credit sector multiple times. The bank's executive Troy Rohrbaugh stated in February that JP Morgan is becoming more conservative regarding private credit risks compared to its peers. A fund manager also confirmed that JP Morgan has been "significantly tougher" in providing backend leverage over the past three months.

Industry Expansion Logic Undermined, Future Risks in Question

The rapid expansion of the private credit industry heavily relies on leveraged financing provided by regulated banks. Since the end of 2020, private equity firms have raised hundreds of billions of dollars, quickly gaining the ability to compete directly with banks for large-scale leveraged buyout financing.

However, a significant amount of underlying assets was formed during the home office boom when software company valuations were high. As corporate cash flow expectations are revised downward, related debts will gradually mature over the next few years, and the market environment at that time will be vastly different from when they were issued.

Currently, private credit institutions insist that enterprise software companies are still growing and expect loans to continue to perform normally. Although no other banks have explicitly followed JPMorgan's tightening stance, as major banks take the lead in reassessing asset values and retail redemption pressures remain high, the market's scrutiny of the industry's liquidity and valuation transparency is expected to intensify