Key facts
- Cox Capital Partners is offering to buy shares in non-traded BDCs at discounts of 15% to 30% to their net asset values.
- Redemption requests increased at 10 of 16 non-traded BDCs tracked by Fitch Ratings in the second quarter.
- Listed BDCs currently trade at an average discount of approximately 25% to their net asset values.
- Partners Group expects withdrawals from some mature evergreen funds to continue for several quarters.
- European regulators are seeking more detailed data on banks' exposure to the private credit market from U.S. authorities.
Pressure is mounting in private markets, evidenced by the widening gap between the stated value of assets and the price investors must accept to exit. Cox Capital Partners this week launched tender offers for shares in non-traded business development companies (BDCs) managed by Apollo, Ares Capital, and BlackRock's HPS Investment Partners, proposing to buy them at discounts ranging from 15% to 30% to their net asset values as of May.
The offers, totaling approximately $31 million, are small but significant in their pricing. Cox is offering Apollo fund investors 70 cents on the dollar, HPS investors 75 cents, and Ares holders 85 cents. These moves come amid increasing redemption requests across non-traded BDCs, with Fitch Ratings noting that requests rose in the second quarter to an average of 10.3% of shares outstanding, up from 9.7% in the prior quarter. Typically, these vehicles limit quarterly repurchases to 5% of net asset value, leading to prorated withdrawals when demand exceeds this limit.
For investors unwilling to wait for redemptions, the secondary market offers an alternative, though liquidity comes at a cost. The price is becoming increasingly apparent, with listed BDCs trading at an average discount of about 75 cents on the dollar. This valuation disparity exists even when public and private vehicles managed by the same firms hold similar portfolios, highlighting how different wrappers can lead to vastly different valuations for comparable private-credit exposures.
The strain is not confined to private credit. Partners Group has indicated that withdrawals from some of its mature evergreen funds are likely to persist for several quarters, following a cap on redemptions from an $8.6 billion private equity fund last month. Despite $16 billion in new client commitments in the first half of the year, clients pulled $3.8 billion, with three mature evergreen strategies accounting for 79% of these outflows. Partners Group estimates that current trends could reduce asset growth by 1% to 2% over 18 months, with potential outflows reaching $10 billion to $20 billion in a downside scenario.
This situation underscores a dynamic in private markets where fresh capital continues to arrive while investors in older funds seek to exit, exposing a central weakness of evergreen funds sold to wealth clients: while they provide access to private assets, easy exits are not always guaranteed. Regulators are also scrutinizing the risks within the approximately $2 trillion private credit market. European supervisors have encountered resistance from U.S. authorities regarding the sharing of more granular information about banks' exposure to this market.
While headline exposures appear modest, with Eurozone banks estimated to hold €62.5 billion in private credit globally (0.2% of their assets), insurers holding around €211 billion and pension funds about €52 billion, regulators are concerned that aggregate numbers mask deeper financial interconnections. Private credit assets can flow through multiple layers, linking banks, insurers, pension funds, and asset managers via instruments like collateralized loan obligations and leveraged lending. An ECB stress exercise found that while direct losses from a severe private-credit shock might be manageable, the greater risk lies in second-round effects, such as broader market selloffs and valuation losses propagating through the financial system. These developments collectively highlight a growing concern that as private markets expand and become more interconnected, limited liquidity and opaque valuations could amplify stress during periods of investor exit.