U.S. Private Lending Under Review... When Will Unlisted BDC Redemption Peak?

Redemption Concerns Persist but Peak May Have Passed
Ongoing Capital Inflows Amid Differentiated Asset Manager Responses
Increasing Likelihood of a Gentle "Soft Landing"

The redemption request rate for Business Development Companies (BDCs)—private investment vehicles for unlisted company growth—has risen further in the second quarter, even among general investors rather than just institutions. However, there are forecasts that redemption pressure may be nearing its peak. Analysts note that additional redemption requests may still occur throughout the year, meaning it will take time for the market to fully stabilize.

On June 23, Samsung Securities provided this assessment regarding concerns over private loan redemptions. The firm found that redemption requests for unlisted BDCs increased further in the second quarter. Given the practice of investors requesting larger-than-needed redemptions in response to proportional allocation measures, Samsung Securities explained that the redemption request rate is expected to have peaked in the second quarter. Kyungja Lee, Head of Alternative Investments at Samsung Securities Research Center, stated, "The redemption request rate may have peaked in the second quarter, but the actual amount redeemed likely reached its high in the first quarter," adding, "This is because some large BDCs were able to process all redemption requests—exceeding 5% of NAV—in the first quarter by utilizing their own liquidity." Notable examples include Blackstone's BCRED and Oaktree Capital's OSC.

BDCs are a type of public fund used to support unlisted venture companies and various private loans. They are designed to allow not only institutional or high-net-worth investors in private equity funds but also general investors to participate via indirect investment. Unlisted BDCs cannot be bought or sold daily on exchanges; instead, they provide liquidity only through quarterly redemption procedures. Most unlisted BDCs set a quarterly redemption limit of 5% of their net asset value (NAV). If redemption requests exceed this limit, only a portion is processed, and the remainder is carried over to the following quarter.

The financial soundness of leading BDCs appears to be robust. According to a stress test by Fitch Ratings, even under the most severe scenario—assuming "no new capital inflows and zero portfolio repayments"—eight BDCs are assessed to have sufficient current liquidity and collateral strength to meet quarterly redemption requests for the next year. As of March, the average leverage ratio for the BDCs in the study was 0.85 times, rising to a maximum of 1.39 times under extreme stress, well below the regulatory limit of 2.0 times.

BDCs are also making independent efforts to improve their financial health. The proportion of payment-in-kind (PIK) interest within the total interest income of the top 15 BDCs tracked by PitchBook declined from 8.6% in the first quarter to 8.2% in the second quarter. PIK refers to the practice of paying interest not in cash, but through additional loans from the fund. A higher PIK ratio can increase concerns about the borrower’s cash flow and loan soundness.

Amid redemption pressure, differentiation among asset managers is emerging. Oaktree Capital’s OSC saw its redemption request rate drop to 4.5% in the second quarter from 8.5% in the first quarter, contrasting with most BDCs, which saw an increase. This is attributed to a conservative strategy, including low leverage, limited software sector exposure, and a low proportion of PIK income. In addition, parent company Brookfield purchased the remaining shares of investors who requested redemptions in the first quarter, enabling OSC to meet 100% of redemption requests and thereby improving trust.

Team leader Lee stated, "While the Oaktree case does not signify an overall easing of redemption pressure across the industry, it does indicate that differentiation among funds and asset managers is beginning." She added, "As new capital inflows into private loans dwindle and funds shift toward real assets such as real estate and infrastructure, capital flows in the alternative investment market are diversifying. This suggests that the private loan market is likely to experience a slow soft landing."

This content was produced with the assistance of AI translation services.