After investors sought to redeem an amount far exceeding the fund’s allowable redemption limit, Morgan Stanley and Cliffwater LLC restricted the redemption amount of their multibillion-dollar private credit fund.
Cliffwater’s flagship private credit fund, which has assets of $33 billion, limited redemptions to 7% in the first quarter after investors had sought to withdraw a record 14% of the shares.
North Haven Private Equity Fund, a $7.9 billion fund under Morgan Stanley, returned about $169 million after setting a 5% cap on redemption requests, which was less than half of the amount requested by investors.
These measures are among the most vivid examples to date of the redemption wave facing private credit funds, as investors’ concerns over the quality of their loans have grown, especially those to software companies threatened by artificial intelligence. While most funds have tried to meet investors’ cash demands, BlackRock decided last week to limit redemptions, and other fund managers have since followed suit.
Representatives of Cliffwater and Morgan Stanley both declined to comment.
Meanwhile, the $1.8 trillion private credit market is facing additional pressure from a review of the value of its illiquid loans.
Cliffwater said in a letter signed by its founder and CEO Stephen Nesbitt on Wednesday that a 7% dividend payout ratio is the “maximum allowed by regulation.” Bloomberg News saw the letter. A company spokesperson confirmed the contents of the letter.
As Bloomberg News previously reported, managers of Cliffwater’s corporate loan funds have been discussing whether to set the redemption cap at 5% or 7%, as they expect the redemption amount to exceed the higher cap.
In the letter, Nesbitt informed investors that the performance of the Cliffwater Fund remained “robust”. He emphasized that since June 2019, the fund’s annualized return has been approximately 9.4%, and “the historical record of realized losses is close to zero”. The letter also mentioned that the fund’s liquidity accounted for 21% of its net asset value.
Nesbitt told investors that the fund honored 7% of redemption requests during the COVID-19 pandemic and agreed to redeem 5.3% of its shares in the last quarter.
Morgan Stanley noted in a letter to clients that the private credit industry is facing widespread challenges, including a decline in asset yields and uncertainty in the M&A environment. However, the company expects that “some of these pressures may ease soon.”
In the letter, Morgan Stanley stated that as of January 31, North Haven had more than $2.2 billion in available liquid funds, and also pointed out that the fund’s annualized net return rate over the past three years was 8.9%.
Morgan Stanley wrote: “The company’s structure has been carefully designed to balance the desire to provide investors with regular liquidity opportunities with the illiquidity of the private assets in which the company invests.”
