Fears about retail-investor participation in private credit are playing out in real time

• Moody's last year flagged risks it sees from a flood of retail money into private markets.
• Some of that appears to be playing out as retail-focused private credit funds face redemption requests.
• Moody's had warned that retail investors might not be prepared for the illiquidity of private markets.

A scenario some market pros had warned about in private credit is starting to play out.

Analysts at Moody's Investors Service last summer had warned that retail-investor participation in private markets could pose a risk. Among their concerns was the idea that retail, accustomed to the daily liquidity of ETFs and stocks, would be caught off guard by the inability to easily trade in and out of private assets.

"One of the most pressing concerns for 'Main Street' investors is liquidity and the inherent lack of it in private markets. Retail investors often require quicker access to their capital and have less long-term investment flexibility," the firm said at the time.

Fast-forward to today, and retail-focused funds from major firms like Blackstone and Blue Owl are seeing a flood of redemption requests.

Blue Owl was one of the first major private capital groups to fuel nervousness about withdrawals when it was reported last month that the firm would permanently halt redemptions from its Capital Corp II fund, a private debt fund it had opened to retail investors.

Instead of being allowed to request a redemption on a quarterly basis, investors now have the option of receiving incremental payments from the company as it sells assets over time, the firm said.

Blackstone, another major presence in the private credit space, was hit with a record $3.8 billion in redemption requests. The flood of requests was so much that the firm tapped more than 25 executives to pool $150 million of their personal funds to help meet the requests.

Speaking to CNBC this week, Blackstone president Jon Gray said the firm's institutional clients were continuing to put "significant amounts" in private credit, suggesting the desire to pull out cash stemmed from nervousness from other types of investors.

"There's a constant spin cycle," he said of recent news in the sector, such as last year's high-profile blowups of First Brands and Tricolor Holdings. "When that's happening, it's not a surprise that investors can get nervous."

Private credit doesn't appear to be at risk of an imminent blowup, even as pockets of uncertainty emerge. Yet, panic about the bear case has grown amid the string of recent headlines.

In the fourth quarter, BlackRock slashed the value of a $25 million loan to Infinite Commerce Holdings to zero after previously valuing it at 100 cents on the dollar, according to a filing first spotted by Bloomberg.

In February, Business Insider reported that Blue Owl had failed to secure a loan for Coreweave's $4 billion data center due to hesitation from other lenders and investors in the space.

In December, the Financial Times reported that negotiations between Blue Owl and Oracle to build a $10 billion data center had stalled, though Oracle denied the report's details.