Pressure for Redemptions Grows in $2 Trillion Private Lending Market

The private lending market is experiencing simultaneous redemption requests, devaluations, and a slowdown in new loans, leading to increased liquidity pressure. With the market size expanding to as much as $2 trillion, there are concerns that stress in the private credit market could weigh on investor sentiment across risk assets.

The Financial Stability Board (FSB) reported on May 6 that the size of the private lending market has grown to between $1.5 trillion and $2 trillion (approximately 2123 trillion to 2830 trillion won) by the end of 2024. The FSB identified the complex structure involving banks, insurance companies, asset managers, and private equity funds, along with deteriorating borrower credit quality, valuation opacity, and liquidity mismatches as key vulnerabilities.

Private lending refers to a market where asset managers or private equity funds lend money directly to companies without going through banks. Compared to public bonds, there are limitations on disclosures and price discovery, and the redemption conditions for investors may differ from the cash conversion speed of the loan assets. This discrepancy becomes evident during market turmoil, manifesting in redemption caps and devaluations.

The backdrop of increased stress this year includes the maturity and interest burden of loans executed during a low-interest period. As interest rates have risen, some borrowers' repayment capacities have weakened, raising concerns about credit deterioration in sectors such as software and healthcare. Minutes from the U.S. Federal Reserve also mentioned the net outflows of some private lending vehicles in the first quarter and the burden on borrowers.

Blackstone's private lending fund BCRED disclosed in a letter to investors on June 4 that redemption requests for the second quarter are about 10% of the issued shares. The fund stated it would only accommodate the usual 5% redemption limit. In the same letter, Blackstone emphasized that it has over $15 billion (approximately 21.225 trillion won) in liquidity and a leverage ratio of 0.8, indicating its capacity to respond.

Earlier in March, Blackstone also allowed BCRED investors to redeem 7.9% of their shares, amounting to approximately $3.8 billion (about 5.377 trillion won). The company increased its previously announced buyback plan and mobilized employee funds to meet the remaining redemption demand.

Redemption pressure has also been observed in other management firms. Blue Owl noted an increase in redemption requests from some non-public BDCs in its Q1 10-Q report. At the same time, it reported new fundraising of $11 billion (approximately 15.565 trillion won) in Q1 and $56.6 billion (about 80.89 trillion won) over the past 12 months. While funds are coming in, the trend of existing investors seeking exits has also intensified.

Non-public BDCs and evergreen funds allow investors to request redemptions at certain intervals, but the loan bonds held by the funds cannot be sold immediately. This is also why management firms impose redemption limits. When redemption requests surge, funds tend to limit redemptions and adjust valuations rather than hastily liquidate assets.

Devaluation is another burden. Reuters cited MSCI data indicating that some private lending funds have valued more than 10% of their loans at over 50% lower than their actual value. Due to the nature of non-public assets, which reflect valuations late, the stability on the books may reveal actual market stress only after a delay.

New loan executions have also decreased. Reuters reported that the size of direct private lending in the U.S. fell by about 55% to $33.59 billion (approximately 47.53 trillion won) in Q2 compared to the previous quarter. During the same period, fundraising for North American closed-end direct lending funds rebounded to $16.25 billion (approximately 22.994 trillion won). This indicates a widening gap between fundraising and actual loan execution.

Regulatory assessments lean towards caution but are far from declaring a systemic crisis. The European Central Bank (ECB) noted in its May financial stability report that leverage and liquidity mismatches in the non-bank sector, including private lending, could amplify market shocks. Conversely, the Fed's minutes also included views that some redemptions do not pose a widespread systemic threat.

The connection to the crypto market lies more in liquidity than direct exposure. CoinDesk reported on July 9 that outflows from Bitcoin (BTC) spot ETFs and redemption requests from private lending were linked as the same liquidity alarm. The redemption requests for private lending in Q2 amounted to $15.6 billion (approximately 22.074 trillion won), while outflows from U.S. listed Bitcoin spot ETFs were about $5 billion (approximately 7.75 trillion won).

For Korean readers, the critical point is the change in risk preference rather than private lending itself. While the expansion of alternative investments and the private market has already become a significant trend in asset management, an increase in redemptions and a decrease in loan executions may slow down price discovery in the non-public credit market. Crypto assets like BTC and Ethereum (ETH) may respond more sensitively to dollar liquidity, ETF fund flows, and interest rate expectations than to individual adverse events during this process.

The flow of on-chain credit markets and the tokenization of real assets are also related to this issue. We previously reported that Razor Digital is investing in ZigChain to target the UAE on-chain credit market. As the redemption structure and price discovery issues of traditional private lending become more pronounced, how on-chain credit products are designed regarding liquidity, disclosures, and redemption conditions will become increasingly important.

Currently confirmed facts include the expansion of market size, redemption pressure, devaluation, and a slowdown in new loan executions. Regulatory authorities and management firms are emphasizing structural vulnerabilities and liquidity response capacities respectively. The impact on the crypto market is likely to emerge more through liquidity pathways across risk assets than through direct shocks.

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