Key Takeaways
- • Investor redemptions from private credit funds, including those run by Blue Owl Capital, BlackRock and Blackstone, are fueled by concerns over defaults on loans to software businesses that may be disrupted by artificial intelligence and higher interest rates, according to The Globe and Mail.
- • Chronicle Wealth's Philipp Soummer argues the sector's core risk is valuation and liquidity mismatch rather than current credit deterioration, stating he is not seeing a deterioration of valuations or defaults.
- • Victor Kuntzevitsky of Wellington-Altus Private Counsel criticizes the marketing of semi-liquid credit funds as "being like an ATM," noting some Canadian legacy funds offered redemption terms of two weeks to a month against illiquid loan books.
- • Contagion risk is elevated in Canada because advisors and investors overlap heavily across funds, and career risk may push advisors to redeem early even at small perceived risk.
- • Kuntzevitsky prefers publicly listed credit funds, which hold similar assets but trade at valuations 30 to 50 per cent below private funds.
Summary
Alarm is building across the roughly $2-trillion private credit industry as investors worry about defaults on private loans to software companies that may be disrupted by artificial intelligence and by higher interest rates. Fear of contagion in an interconnected financial system has prompted some investors to pull capital from funds run by Blue Owl Capital, BlackRock, Blackstone and others, according to The Globe and Mail.
Philipp Soummer, who manages the private credit fund at Chronicle Wealth, a Toronto-based multi-family office, says the sector is in better shape than the headlines suggest. He separates two risks, liquidity and valuation, and argues the latter is far more serious. "Right now, I'm not seeing anything regarding a deterioration of valuations or from a default perspective," he says. The core issue, in his view, is a gap between retail investors' liquidity expectations and the structure of the funds, which have effectively democratized access to private equity and private credit. "Investors want both the upside from the illiquidity, and they want the yield premium. You have to pick one."
Victor Kuntzevitsky, portfolio manager at Stonehaven Private Counsel within Wellington-Altus Private Counsel in Aurora, Ont., views the current stress as orderly and a sign of a maturing market. He faults marketing that has presented these products as attractive yield vehicles "being like an ATM, where funds could be withdrawn at any time." He notes some Canadian legacy credit funds offered redemption windows of two weeks to a month, creating a mismatch with their loan books. When redemptions overwhelmed them, they lacked sufficient cash and were forced to gate. He warns contagion risk is higher in Canada because advisors commonly hold the same funds, so one gate can trigger redemption requests elsewhere. Soummer adds that career risk compounds this, as advisors may redeem early to protect their jobs even when the perceived chance of a broader problem is only about 1 per cent.
Steve Balaban, chief investment officer of Mink Capital and founder of Mink Learning, says private markets can provide stability and diversification, noting most of the world's companies are privately held and the S&P 500 is increasingly concentrated in large technology companies. He questions the high fees charged by private credit funds and says retail investors lack transparency on borrowers and loan structures, whereas family offices and institutions can lend directly to companies they understand.
Soummer stresses that private investments demand labour-intensive due diligence, including understanding loan seniority in the capital structure, leverage, collateral, borrower business quality and covenants. Kuntzevitsky rejects the notion that multi-asset-class portfolios are essential for every investor, and for new capital he favours publicly listed credit funds, some of which hold similar assets at market valuations 30 to 50 per cent lower than private counterparts.
Philipp Soummer, who manages the private credit fund at Chronicle Wealth, a Toronto-based multi-family office, says the sector is in better shape than the headlines suggest. He separates two risks, liquidity and valuation, and argues the latter is far more serious. "Right now, I'm not seeing anything regarding a deterioration of valuations or from a default perspective," he says. The core issue, in his view, is a gap between retail investors' liquidity expectations and the structure of the funds, which have effectively democratized access to private equity and private credit. "Investors want both the upside from the illiquidity, and they want the yield premium. You have to pick one."
Victor Kuntzevitsky, portfolio manager at Stonehaven Private Counsel within Wellington-Altus Private Counsel in Aurora, Ont., views the current stress as orderly and a sign of a maturing market. He faults marketing that has presented these products as attractive yield vehicles "being like an ATM, where funds could be withdrawn at any time." He notes some Canadian legacy credit funds offered redemption windows of two weeks to a month, creating a mismatch with their loan books. When redemptions overwhelmed them, they lacked sufficient cash and were forced to gate. He warns contagion risk is higher in Canada because advisors commonly hold the same funds, so one gate can trigger redemption requests elsewhere. Soummer adds that career risk compounds this, as advisors may redeem early to protect their jobs even when the perceived chance of a broader problem is only about 1 per cent.
Steve Balaban, chief investment officer of Mink Capital and founder of Mink Learning, says private markets can provide stability and diversification, noting most of the world's companies are privately held and the S&P 500 is increasingly concentrated in large technology companies. He questions the high fees charged by private credit funds and says retail investors lack transparency on borrowers and loan structures, whereas family offices and institutions can lend directly to companies they understand.
Soummer stresses that private investments demand labour-intensive due diligence, including understanding loan seniority in the capital structure, leverage, collateral, borrower business quality and covenants. Kuntzevitsky rejects the notion that multi-asset-class portfolios are essential for every investor, and for new capital he favours publicly listed credit funds, some of which hold similar assets at market valuations 30 to 50 per cent lower than private counterparts.
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