Private Credit Exit Costs Exposed as Tender Offers Surface at Steep Discounts

A stark gap is emerging between the stated value of private credit assets and the price investors must accept for an early exit, signaling growing pressure in the market. This liquidity challenge was highlighted by recent tender offers from Cox Capital Partners for shares in several non-traded business development companies (BDCs).

The Price of an Exit

Cox Capital launched offers to buy shares in BDCs managed by some of the industry's largest players, pricing them at significant discounts to their May-end net asset values (NAV). The offers, while small at a combined $31 million, reveal the potential cost for investors seeking immediate liquidity.

• Apollo (APO) fund: Offered at 70 cents on the dollar.
• BlackRock's (BLK) HPS Investment Partners fund: Offered at 75 cents on the dollar.
• Ares Capital (ARCC) fund: Offered at 85 cents on the dollar.

These discounts, ranging from 15% to 30%, provide a tangible measure of the illiquidity premium in a market where exit options are limited. For investors unwilling to wait for periodic repurchase windows, the secondary market is an alternative, but one that comes at a clear cost.

Redemption Queues Grow

The tender offers come as redemption requests across the non-traded BDC space intensify. According to a report from Fitch Ratings, redemption requests increased at 10 of the 16 BDCs it tracks in the second quarter, reaching an average of 10.3% of shares outstanding. This figure surpasses the typical quarterly repurchase limit of 5% of NAV.

When requests exceed this cap, withdrawals are often prorated, forcing some investors to remain in redemption queues for multiple quarters. This growing backlog puts a spotlight on the valuation disconnect between private vehicles and their publicly traded counterparts, which hold increasingly similar assets but trade at an average of 75 cents on the dollar.

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Strain Extends Beyond Credit

The liquidity strain is not confined to private credit. Asset manager Partners Group recently warned that withdrawals from some of its mature evergreen funds would likely continue for several quarters. The firm capped redemptions from an $8.6 billion private-equity fund last month after clients pulled $3.8 billion in the first half of the year.

This situation highlights a key challenge for the evergreen fund model: while it offers retail investors access to private assets, it does not guarantee easy exits. In a downside scenario, Partners Group projected that outflows from the affected funds could reach $10 billion to $20 billion.

Regulators Circle Opaque Market

The developments are also drawing the attention of financial regulators. European supervisors are seeking greater insight into banks' exposure to the roughly $2 trillion private-credit market, though they have faced resistance from U.S. authorities on sharing granular data, Reuters reported.

While direct exposure for euro zone banks appears modest at an estimated €62.5 billion, a European Central Bank stress test found the primary risk lies in second-round effects. Regulators are concerned that opaque valuations and hidden financial links could amplify stress, causing valuation losses to spread through the broader financial system during a market shock.