The flagship private credit fund of Cliffwater LLC capped redemptions at 5% in Q2 after investors sought to redeem approximately 17% of the fund’s shares amid ongoing turmoil in the $1.8 trillion private credit sector.
Cliffwater told shareholders of Cliffwater's Corporate Lending Fund (CCLFX) in a letter that they would receive one-third of the money they requested back, Bloomberg reported.
"Our repurchase program is intentionally designed to provide shareholders with periodic liquidity that aligns with the fund's long-term investment strategy and its underlying assets," Cliffwater CEO Stephen Nesbitt said in the letter to investors, and reported by Bloomberg.
In Q1, investors were able to redeem approximately half of the 14% they had requested, as the fund capped withdrawals at 7%. Following this announcement, S&P Global Ratings slashed the fund’s outlook from stable to negative, citing "higher investor redemption requests."
"The liquidity profile of the fund could weaken if large redemption requests continue and the decision to allow redemptions above the 5% minimum becomes the new norm rather than the exception. We view the 5% redemption cap as an important guardrail for liquidity. Raising the redemption cap to 7% per quarter would weaken our opinion of the fund’s liquidity,” S&P said.
The $32 billion fund has achieved a 9.4% annualized net return since its 2019 inception. The fund holds ample liquidity to meet 5% quarterly redemptions for over a year without forced asset sales, the firm previously noted.
Private credit funds have been capping redemptions at 5% in recent months amid rising concerns over asset quality and valuations in private credit, particularly software lending.
Partners Group is restricting investor withdrawals from its $8.6 billion Global Value SICAV fund after redemption requests exceeded 5% of the net asset value, a move that rattled sentiment across private markets.
The firm pointed to instability across open-ended vehicles since early last year, beginning in private credit and later affecting private equity, Reuters reported.
BlackRock, Ares Management, Morgan Stanley and Barings have also limited redemptions from private credit funds as of late.
Last month, JPMorgan Chase & Co. (NYSE:JPM) started restricting lending to software-related companies in its private credit funds.
JPMorgan CEO Jamie Dimon cautioned that periods of calm in credit markets often mask the buildup of risk, warning that performance typically deteriorates more than expected once the credit cycle turns.
"I do think when we have a credit cycle because there have been weakening standards in underwriting and transparency and marking, I do think you'll see credit perform worse than people expect. That's all. I don't think it's systemic," he said during the Reagan National Economic Forum.
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