Private credit discounts hit 26% as trapped investors seek exits

Cox Capital Partners offered to buy up to $90 million in business-development company shares and assets at an average 26% discount to net asset value, as redemption caps at major private credit vehicles leave investors waiting for exits.

"I have a level of confidence in the underlying portfolios but less confidence in the exit outcomes of these products," John Cox, chief executive at Cox Capital Partners, said.

The offer targets five vehicles overseen by Blue Owl Capital, Ares Management, Apollo Global Management and BlackRock's HPS Investment Partners. Fitch Ratings reported BDC inflows dropped about 56% on average in the second quarter from the first, with 12 of 14 tracked vehicles posting net outflows. Blackstone's BCRED took in $1 billion in inflows against $2.2 billion in redemptions, while its net asset value fell 3.4% year over year to $42.8 billion.

The structural tension between 5% quarterly redemption caps and investor exit demand is creating a two-tier market where secondary buyers capture steep discounts. Fitch's U.S. Private Credit Default Rate rose to 6.1% for the 12 months through July, and PitchBook LCD data shows nonaccrual BDC loans at 4.69% in the first quarter, up from 4.26% a year earlier — suggesting the liquidity squeeze could persist into 2027.

Redemption requests at some nontraded BDCs continued to climb into the second quarter. Fitch said total requested redemptions from the 15 BDCs it tracks averaged 10.3% of shares in the three months ending in June, up from 9.7% in the first quarter. Most affected vehicles maintained their 5% quarterly caps, forcing investors to queue or seek alternative liquidity.

The software exposure that drove the initial wave of withdrawal requests remains a central concern. Franklin Templeton reported that software and information technology services companies comprise around 26% of BDC portfolio holdings, citing Morgan Stanley estimates. Octus Intelligence calculated BDCs held $152.6 billion in software investments as of last September, about 29% of their overall holdings. PitchBook LCD reported nonaccrual BDC loans — debt not paying interest — rose to 4.69% of the portfolio in the first quarter from 4.26% a year earlier, tracking 213 BDCs with $516 billion in loans outstanding.

Redemption Pressure Spreads Beyond Software

Blackstone's BCRED, the largest nontraded BDC, saw redemption requests rise to 10% of shares valued at $4.4 billion during the second quarter, up from about 8% in the previous quarter. The firm held to its 5% limit. By July, redemption requests had declined materially, Jonathan Gray, Blackstone president and chief operating officer, said on the firm's second-quarter earnings call — a positive sign for early third-quarter flows.

That easing may not hold. "We will see another quarter, maybe another two quarters, of net outflows, but there is a case that that reverses quite quickly because rates are stable, spreads are better and the broader underlying markets are fine," Jeffrey Griffiths, global head of private credit at Campbell Lutyens, said last month.

The February attempt by Cox Capital and Saba Capital Management to buy Blue Owl Capital Corp. II shares at discounts of as little as 20% met with scant success — investors tendered less than 1% of the privately held BDC's shares. The steeper 26% average discount in the current offer reflects both the persistence of redemption queues and the software-specific concerns embedded in the underlying portfolios.

"The software story has very much stabilized from the beginning of the year, when there was a lot of panic," Griffiths said.

The broader private credit market has grown rapidly over the past decade, with BDCs becoming a primary funding source for midmarket companies. That growth has made the current liquidity stress more consequential — the vehicles now hold hundreds of billions in loans, and the redemption caps designed as a safety valve have become a bottleneck for investors seeking to exit.

The implications extend beyond individual vehicles. If redemption pressure persists, BDCs may face pressure to adjust their redemption policies or raise capital at dilutive valuations. The widening gap between net asset value and secondary market prices also raises questions about how accurately BDCs are marking their portfolios, particularly in software-heavy segments where AI-driven disruption fears have yet to fully resolve.

This article is for informational purposes only and does not constitute investment advice.