Private credit investors prefer to be trapped than take 26% loss
Limited appetite to exit suggests angst around the asset class has limits
As limited investors hesitated to exit private credit funds, Cox Capital Partners put forward an offer to purchase shares of five non-traded business development companies (BDCs) at an average 26% discount. However, the firm only managed to draw less than US$5 million in redemption orders, according to sources familiar with the matter.
The limited interest in exiting the asset class indicates that the concerns around private credit, fueled by asset quality and software exposure, have certain limits. It also suggests that investors might be accepting lower-than-promised returns, even when presented with the alternative of a significant loss. Cox Capital CEO John Cox expressed disappointment but optimism, stating that the adoption of such strategies will increase as investors become more comfortable with the concept.
The firm may also adjust its offers depending on market conditions. The prospect of double-digit returns initially attracted retail investors to BDCs, but as interest rates rose after the pandemic, corporations began facing pressure. This resulted in the US private credit default rate hitting a record high in April. As a result, non-traded private credit funds began paying out more money to investors than they raised, leaving some investors trapped due to redemption limits.
To address these concerns, some funds devised creative ways to cover requests, and Cox Capital extended its strategy to interval funds. The performance of publicly traded BDCs has improved recently, with their stock climbing around 6% since Cox initiated offers for non-traded BDC shares. This improvement is attributed to better management and reduced bad investments.
Despite a slight decline in net asset value during the second quarter, it still dropped at a slower rate than the previous quarter, according to data from Raymond James. Blue Owl, which has been a focal point of the turmoil in the US$1.8 trillion private credit market, faced investor discontent over its redemption policy. Cox Capital and Saba Capital Management made a plan to buy shares in its non-traded fund, OBDC II, but ultimately, investors sold less than 1% of their holdings.
Written by urgent.news from The Business Times - Companies & Markets's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
