US Stock Market: Morgan Stanley, Cliffwater cap withdrawals from their private credit funds

Morgan Stanley and Cliffwater capped withdrawals from their multibillion-dollar private credit funds after investors sought to redeem vastly more than the vehicles allow.

Cliffwater's $33 billion flagship private credit vehicle limited redemptions to 7% of shares in the first quarter, after investors sought to pull a record 14%. Morgan Stanley's North Haven Private Income Fund, which has almost $8 billion in assets, returned around $169 million, or less than half of investors' requests, after capping redemptions at 5% of shares.

The moves are among the starkest examples yet of private credit funds grappling with a wave of redemption requests amid growing concerns over the quality of their loans, particularly to software companies under threat from artificial intelligence. While most funds had sought to meet investor demands for cash, BlackRock Inc last week decided to limit withdrawals, a move that other managers have since followed.


Meanwhile, the $1.8 trillion private credit market is facing additional pressure from scrutiny over the value of its illiquid loans.

JPMorgan Chase is restricting some lending to private credit funds after marking down the value of certain software-linked loans in its portfolios. The decline in those asset values will limit how much the bank can lend to the funds, though the move affects only a small group of borrowers and has not triggered any material margin calls so far.

As for the wave of redemptions, private credit funds focused on retail investors are typically required to offer quarterly repurchases of their shares - but aren't built to easily accommodate a rush for the exits. Cliffwater said a payout of 7% was a "regulatory maximum" in a Wednesday letter signed by founder and CEO Stephen Nesbitt and seen by Bloomberg News.'

In the letter, Nesbitt told investors the Cliffwater fund's performance "remains strong". He highlighted an annualised return of about 9.4% since June 2019 and a "historical track record of near zero percent in realized losses." The fund's liquidity as a percentage of net asset value is 21%, the letter said.

The fund honoured 7% of withdrawals during the Covid pandemic and agreed last quarter to redeem 5.3% of shares, Nesbitt mtold investors.