Redemption restrictions trigger a trust crisis! Morgan Stanley (MS.US) follows the trend of "closing the gate," and financial stocks are collectively bloodied.

After restricting withdrawals from a certain private credit fund under its management, Morgan Stanley(MS.US) stock price fell on Thursday, declining along with shares of several large asset management firms. Morgan Stanley’s stock dropped 4.1%, closing at its lowest level since October last year. Apollo Global Management(APO.US), KKR(KKR.US), and Ares Management(ARES.US) all declined more than 3%. The KBW Bank Index fell 2.5%, marking its sixth consecutive day of decline.

Following investor attempts to redeem far more than the permitted amount, Morgan Stanley and Cliffwater became the latest fund managers to impose redemption restrictions on private credit funds worth billions of dollars. Recently, private credit funds have faced a wave of redemption requests as market concerns over their loan quality continue to rise—especially for loans to software companies vulnerable to artificial intelligence disruptions. Although most funds had previously tried to meet investor cash needs, BlackRock(BLK.US) decided last week to restrict withdrawals, a move subsequently adopted by other managers.

Bloomberg Intelligence analyst Herman Chan said, “Given the interconnectedness among banks and their exposure to private credit firms, negative news about redemption gates continues to dampen market sentiment in the banking sector. Although banks’ direct exposure to private credit loans is relatively limited, the market is currently selling first and asking questions later.”

Financial stocks experience turbulence

These redemption restrictions have become the latest negative catalyst for alternative asset management companies and bank stocks. Since the beginning of the year, concerns over artificial intelligence competition tools and services, as well as potential risks from private credit exposure, have continued to weigh on the stock performance of banks, payment companies, and asset managers.

Meanwhile, Blue Owl Capital(OWL.US) recently told investors that there are no backstop clauses or hidden incentives in the $1.4 billion loan transactions from three of its funds. The asset manager’s stock briefly fell nearly 5% on Thursday, then narrowed its decline. Data shows the stock is currently in a severely oversold condition. At the same time, the broader US stock market also declined on Thursday, as oil prices surged again, raising market concerns—potentially further constraining energy supplies and pushing inflation higher amid Middle East conflicts. The S&P 500 fell 1.5%.

$1.8 trillion private credit market faces redemption wave

For months, executives in the private credit industry have sensed that a liquidation moment is approaching. A series of high-profile defaults has shaken investor confidence. Market anxiety over large exposures to private credit, especially to software companies vulnerable to AI impacts, is intensifying. Meanwhile, retail investors, who spent years building their positions, are beginning to withdraw funds from the industry’s largest funds, putting pressure on redemption limits designed to prevent forced asset sales.

Subsequently, BlackRock drew a line. Last Friday, the firm announced it would limit redemptions in its $26 billion HPS Corporate Lending Fund to 5%, even though investor redemption requests had nearly doubled that limit. This was the first time since market tensions began that a major private credit manager imposed redemption restrictions on a perpetual fund.

This move is concerning for an industry that has expanded to $1.8 trillion and is about to enter the U.S. 401(k) retirement account market. It could trigger a backlash from retail investors eager to withdraw their funds. It also reaffirms long-standing warnings from industry skeptics—that selling illiquid assets to panicked clients carries risks.

Meanwhile, in private discussions, many industry executives say they actually hoped industry giants like BlackRock would take the lead, providing “cover” for others. They believe the alternative—meeting all redemption requests—could have impacts far beyond the current quarter, including squeezing capital for new deals, harming long-term investors, and setting expectations that these funds never intended to meet.

Like hedge funds trading illiquid assets, private credit lenders often cannot quickly sell their loans. To avoid being forced to sell assets at low prices during panic, most retail-focused funds set structural limits—allowing redemption of no more than 5% of net asset value per quarter.

However, this cap is not strictly enforced. In recent months, some managers have allowed redemptions exceeding this limit, emphasizing that their portfolios remain healthy and highly profitable. They hope this flexibility can ease investor tensions. But this practice also sparks debate—whether short-term image concerns outweigh long-term discipline, ultimately rewarding those who exit first. Some industry leaders even oppose calling the redemption limit a “gate,” since it is embedded in the fund structure. If not enforced, this argument weakens.

Compared to BlackRock, Blackstone(BX.US) has taken an unprecedented approach—allowing investors to withdraw funds while showing confidence in the private credit recovery. Last week, the firm permitted a record 7.9% redemption from its flagship $82 billion private credit fund BCRED. To meet demand, Blackstone mobilized about $150 million from over 25 senior managers’ personal investments and approximately $250 million from the firm itself.

Sources say that due to high redemption demands in the previous quarter—including BCRED—Blackstone had prepared for redemptions exceeding 5%. Management based its decision on net fund flows and liquidity conditions, both of which were deemed sufficiently healthy, allowing full redemptions.

This move not only exceeded the standard 5% quarterly redemption limit but also surpassed the usual 2% buffer considered acceptable. Last year, Blue Owl Capital allowed investors to redeem more than 15% of net assets from its technology-themed fund in the fourth quarter.

Many large funds, including those managed by Apollo Global Management, Ares Management, and Blue Owl Capital, remain in their first-quarter redemption window, with investors actively deciding whether to withdraw. Most funds are still attracting new capital, but inflows are lower than redemptions.

JPMorgan tightens private credit fund loans; PIMCO warns of “liquidation” in the industry

Amid rising pressures in the private credit market, JPMorgan(JPM.US) has begun restricting loans to certain private credit funds, citing a downgrade of some loans in its portfolio. Additionally, reports indicate JPMorgan is re-evaluating the value of its private credit investments on its balance sheet and has proactively marked down related assets.

Sources say JPMorgan’s actions involve loans to software companies, a sector recently under scrutiny due to investor concerns over AI-related risks. Reports also state that CEO Jamie Dimon said last week at a bank meeting that the bank would be more cautious when lending to software assets.

Dimon previously warned in October that the once-booming but opaque private loan sector—where prices are often undisclosed—would see more “roaches.” Recent weeks have seen heightened worries, partly due to investor concerns about AI risks to some borrowers and valuation issues. Last month, a Blue Owl Capital fund paused quarterly redemptions and began selling assets to return funds to investors.

However, sources say JPMorgan’s move is a precautionary measure and not the first time the bank has re-evaluated its assets.

Meanwhile, PIMCO’s senior executives have sharply criticized industry standards, which they say have been lax for years, and now face a “liquidation.” PIMCO President Christian Stracke recently stated in a podcast that the market is experiencing a “liquidation.” “This is not just a confidence crisis but a crisis caused by poor underwriting standards,” he said, noting that years of lax credit standards are now showing stress, especially as well-known companies encounter problems, raising concerns about loan quality and software sector risks.

Stracke expects default rates to rise to mid-single digits over the next few years, with investor returns dropping from about 10% to 6%. But he emphasized that a broader credit crisis is unlikely. He pointed out that the sector lacks transparency, and when some loans are written down to zero, some investors may “rush to assume all other assets are just as bad,” but that’s not the case. He believes that as long as the U.S. economy performs reasonably and the Fed leans toward rate cuts or holds rates steady, a spiral of credit tightening is unlikely.

As an early critic of private credit, PIMCO has always monitored this sector. Analysts Lotfi Karoui and Gabriel Cazaubieilh wrote in a report earlier this month that the record fundraising since the 2008 financial crisis means direct lending tools are now under a real stress test.