The $265 billion private credit meltdown: How Wall Street's hottest investment craze turned into a panic - Fortune

It was a glorious time to make money. From early summer 2023 to the close of January 2025, private equity stocks staged what may rank as the single biggest surge, over a tight time frame, in the annals of financial services. In that eighteen month span, Blackstone notched total returns 58.2%, Ares, Apollo, and Blue Owl achieved 68.1%, 77.9%, and 80.6% respectively, and KKR led the charge at 103.4%. Then the cyclone came. Starting in September of last year, an historic selloff that from their peaks sent down Apollo 41%, Blackstone 46%, and Ares and KKR 48% each, while Blue Owl dropped by two thirds. The wipeout has erased over $265 billion in market cap; Blackstone and Blue Owl are now trading far below their levels of late 2021, and the sudden drop left KKR, Apollo and Ares showing puny, market-trailing gains over that near half-decade.

To be sure, the PE business has suffered from overpaying for its buyout picks in the period of ultra-low interest rates, a problem that’s forcing them to hold their portfolio companies for extended periods, and curtailed profits when they’re sold. But until recently, it was the tremendous growth in private debt that far more than offset the slump in their traditional franchise, and accounted for the wondrous performance of their stocks. Now, panic is roiling the funds holding loans to software outfits perceived to be threatened by AI, and investors, especially newly-recruited retail folk, are demanding their money back. “It resembles a run on a bank,” says Matt Swain, co-head of Equity Capital Solutions at investment bank Houlihan Lokey.

The problem is that the regular folk drawn to these funds high yields, in many cases, are proving far less patient than the super-long term holders that are the traditional pillars of private credit. Now enough of those newcomers are seeking large redemptions that it’s causing major distress at the PE world’s biggest and most profitable funds. The demands are so big that in many cases, the industry’s giants are in some cases shutting the gates, further raising worries and spurring the hunger to flee.

So how did things go south so quickly? And, can anything stem the bleeding? As always on Wall Street when someone is selling, someone else is buying at the right price—and some think that so-called “secondary” funds will be the winners here. “These deals may make a lot of sense for the secondary funds,” says David Feirestein, founder and managing partner at Ronin Equity Partners, a major New York PE firm. “The best opportunities are in markets where people get a little scared.”

Big PE firms are gating the exits—and retail investors are trapped inside

In the past, PE investors were mainly large institutions that garnered high interest payments for allowing their money to be tied up for, say, 8 or 10 years. The PE titans saw high net worth and middle class investors as a huge potential market for these products, and succeeded in attracting immense inflows from the retail realm. For example, Blue Owl garnered around 40% of its over $300 billion in assets under management from individuals. The whole idea, as Morgan Stanley states on their website, was to “democratize” the market by giving average people access to the same products as say, pension funds or multi-billionaires. The appeal was obvious: the Blackstone Private Credit Fund (BCRED) has delivered annual returns of 9.8% since its inception.

This new category became known as “semi-liquid” vehicles. They come in a number of flavors. Among them a type of Business Development Companies or BDCs that don’t trade on an exchange. Instead, investors can make requests to redeem all or part of their shares, but the PE managers typically cap total withdrawals per quarter at a fixed percentage of their net asset value, often 5%. Hence the term “semi-liquid.” According to Morningstar, semi-liquids became one of the hottest financial products on the planet, surging from AUM of just $200 billion at the start of 2022 to $500 billion in Q3 of last year.

The trouble began in September of last year via the back-to-back bankruptcies of two companies fueled by loads of cheap debt subprime auto lender Tricolor, and car-part-maker First Brands. Their debt was held by banks rather than PE firms. But then, the fear that AI could render swaths of the software trade outmoded moved a wave of the savings-for-retirement crowd to demand their money back.