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Private Credit's Margin Call Moment Arrives As Morgan Stanley, Cliffwater Gate Investors

Tyler Durden's Photo
by Tyler Durden
Thursday, Mar 12, 2026 - 02:45 PM

Now that the private credit bubble has burst and the liquidation firesales have begun (amid such jump to default events as BlackRock remarking one of its private credit loans from par to 0 in three months), it's getting very challenging to keep up with all the dismal headlines on a daily, let alone hourly basis.

But we'll try.

First, for those who have not kept up with the spectacular slow-motion (at first, although it is now accelerating at a staggering pace) private credit disaster, we suggest catching up with these must-read articles detailing the bursting of the private credit bubble, and how we got to where we are :

For those pressed for time, the arc of the crisis goes something like this. In late January and early February, UBS and Barclays independently published research reports revealing the extensive exposure of the private credit industry to software loans. As the following Barclays chart revealed, business products and services accounted for about 30% of private credit portfolios as of 3Q25, while information technology made up around a quarter, or 55% of the total loan book when combined. 

Using more granular sector classifications, software/SaaS rose to the largest sector exposure across the BDC industry, at around 20% of fair value. 

This revelation came just as Anthropic's Claude was systematically obliterating one software company and sector after another with its multipurpose agents, sending software stock prices plunging and sparking a panic on Wall Street about the long-term viability and industry moat of software, when faced with such a faceless and disruptive opponent as AI.

And with stock prices suddenly collapsing, questions immediately emerged about the predictability and sanctity of cash flows backing the loans in these same software companies, which also make up the bulk of private credit portfolios.

This is when the Private Credit house of cards started to fall. 

As investors emerged from their multi-year opium daze fueled by billions in retail investor and institutional capital, and realized that the glossy and artificially inflated ratings by conflicted, no-name companies such as Egan-Jones (which has rated over 3000 private credits out of a four-bedroom colonial house outside of Philadelphia) were bogus and that the underlying assets are far more impaired than where they were held on the books, redemptions exploded... and the dominoes started to fall. 

First it was Blue Owl, the largest pure play Private Credit fund with over $300 billion in AUM. The company, the first to face massive redemption demands, refused to gate investors and instead announced it would sell $1.4 billion in private loans (it was unclear which loans were sold, but Goldman suggested that these are likely the best ones so as to find willing buyers, leaving the company with the toxic sludge) from its three BDCs (OBDCII, OBDC and OTIC) at 99.7 cents (a number which was meant to inspire confidence yet was laughable, especially since once of the "buyers" was a related-party insurance company, Kuvare, also owned by Blue Owl), to satisfy redemption requests. 

In our February 19 article describing the Blue Owl transaction, we said that "while it is unclear how deep the secondary market for private credit assets is, to the extent demand is relatively scarce, a transaction of this size could dry up market liquidity. If that assumption is true, other BDCs looking to exit portfolio investments could be jeopardized. Recall the immortal line from Margin Call: "Be First, Be Smarter, or Cheat."

We then said that "this could very well be Blue Owl's "Be First" moment... "Sell it all, today" especially if it were to later emerge that the secondary market is only deep for higher quality private credit assets, like the ones in the portfolio OWL is selling. In a concurrent report, Barclays warned that "if this transaction dries up secondary liquidity for private credit assets (or proves that the bid is only there for higher quality assets), it could be negative for other BDCs exploring portfolio sales."

In retrospect, this is precisely when the "Margin Call moment" of the private credit sector happened, because what happened next would make the market's head spin.

And to be fair, while Blue Owl started the liquidation cascade, at least it did not start the gating epidemic: to be fair to the alternative investment manager, it tried to avoid sparking a sheer panic by gating investors and instead proceeding with asset sales. 

Just days later, a similar situation befell one of the world's largest asset managers, when Blackstone's BCRED private credit fund was also facing a surge in redemption requests from panicking investors. It, too, did not gate outflows but instead put the company's own money to fund the 0.9% differential between the 7.9% in total redemption requests and the statutory max tender offer for 7% of the fund: yes, Blackstone's own senior partners ended up handing over $150 million to investors. 

While Blackstone's solution to the bank private credit run may have eased some nerves, what happened poured gasoline on the fire. Just hours after the Blackstone announcement, that "other" Black- fund,  Blackrock, announced that one of its private credit funds, BlackRock TCP Capital Corp. reported in its fourth-quarter filings release that a $25 million loan to Infinite Commerce Holdings, an Amazon aggregator that buys up online sellers of products from spa treatments to light bulbs, was now worthless. The problem: the fund had marked the junior debt at 100 cents on the dollar in the third quarter. In other words, total wipeout in 3 months.

And if Blue Owl's decision to start selling its loan was the "margin call moment", Blackrock's remarking of a par loan to zero was the tipping point. Sure enough, the very next day, another of the company's private credit funds - the 26 billion HPS Corporate Lending Fund, one of the industry’s largest non-traded business development companies - said shareholders requested 9.3% of their shares, but management decided to cap the repurchase at 5%. The total amount of shares would have been around $1.2 billion, according to Bloomberg calculations.

In other words, Blackrock just did what Blue Owl and BlackStone had so desperately tried to avoid doing as they knew very well, it would spark even more redemptions, forcing even more firesales, leading to even more remarking from 100 to, well, much lower, and so on.

At this point it was literally every man for themselves. 

The first among them was the fund which former Point72 manager David Rosen said in a mid-February must-read letter (available here to pro subs) would be "First Domino In Private Credit Bank Run." He was referring to the interval fund Cliffwater, one of the oldest names in the space. This was he said. 

The industry realized that the fleeting liquidity offered by BDCs would not sell well to retail investors that may legitimately need nearer term liquidity, so they began aggressively pitching semi-liquid solutions in the form of interval funds. Interval funds, like BDCs, offer quarterly liquidity, but with a key difference: they are required to repurchase at least 5% of outstanding shares. These interval funds have now grown to more than $80bn in net assets, with roughly half coming from Cliffwater – a private credit research firm turned interval fund manager that, from what we understand, is already facing capital constraints. 

Rosen concluded his letter by saying that he "would not be surprised if Cliffwater is the canary in the coal mine and will be the first domino in the “bank run” we foresee."

Fast forward to last night when inbetween the barrage of Iran-related headlines, Bloomberg reported that Cliffwater had indeed hit the brick wall of "capital constraints", after it was flooded with a barrage of redemption requests in excess of 7% from its flagship private credit fund. 

Now if it ended up being "just" 7% it woiuld be bad... but would not be catastrophic. That's because like Blackstone's BCRED fund, if redemptions exceed 5%, Cliffwater has discretion to repurchase as much as 7% of outstanding shares.

The problem, as we learned today is that it wasn't 7%: as Bloomberg reported late today, investors sought to pull double what had been initially reported, or a record 14%. And immediately investor gates were raised after Cliffwater's $33 billion flagship private credit vehicle limited redemptions to 7% of shares in the first quarter.

Cliffwater said a payout of 7% was a “regulatory maximum” in a Wednesday letter signed by founder and CEO Stephen Nesbitt and seen by Bloomberg News. Managers of the Cliffwater Corporate Lending Fund had been debating whether to cap redemptions at 5% or 7% as it anticipated redemptions to exceed the higher mark, Bloomberg News previously reported. In the end, the fund generously raised the gate cap to 7%. 

Now, as a reminder, all this is happening following the latest shock news from JPMorgan which sparked a small market panic overnight, when the largest US bank effectively margin called its clients, with the FT reporting that it "clamped down on its lending to private credit groups, with bankers looking to cut risk as concerns mount over the credit quality of companies in their stables."

According to the report, the bank informed private credit lenders that it had marked down the value of certain loans in their portfolios, which serve as the collateral the funds use to borrow from the bank. As one would expect, the loans that have been devalued are to software companies, which as noted above, are seen as particularly vulnerable to the onset of AI and which account for the bulk of private credit loans made in recent years.

One person briefed on the bank’s decision said the valuation haircuts did not trigger margin calls at funds but were done to pre-emptively reduce the amount of credit available to the funds: "They have been more difficult the past three months,” the head of one fund said of JPMorgan’s willingness to provide back leverage. He added JPMorgan rarely got “rattled and this is the first time we’ve had a little issue."

Yet this is where the shrewdness of Jamie Dimon shines through: long a private credit skeptic, the CEO made JPMorgan an outlier in the private credit financing business as the bank reserved the right to revalue assets at any time. Most other banks require triggers such as missed interest payments. But not JPM, because it's good to be king, which is kinda like cheating, and it's why you don't have to be first if you can margin call the entire industry. 

Which brings us to tonight's second big private credit story: Morgan Stanley, which unlike JPMorgan could not margin call the private credit industry. As Bloomberg also reports, Morgan Stanley’s North Haven Private Income Fund, which has almost $8 billion in assets, returned around $169 million, or less than half of investors’ tender requests, after also gating investors and capping redemptions at 5% of shares.

In its letter to clients, Morgan Stanley pointed to challenges facing the private credit industry broadly, including a contraction in asset yields and uncertainty around the M&A environment. Still, it expects that “some of these pressures may soon ease.”

North Haven had over $2.2 billion of liquidity available as of Jan. 31, Morgan Stanley said in the letter, while noting a 8.9% annualized net return over three years for the fund. “The structure of the company was intentionally designed to balance the desire to offer investors the opportunity for periodic liquidity with the less liquid characteristics of the private assets in which the company invests,” Morgan Stanley wrote in words that sounded quite hollow to those investors in its fund, who desperately need their money now.

To put recent moves into context, we have gone from no gates, to asset liquidations but still not gates, to one gate last week, to two gates in one day.

One could say that things are accelerating. 

And by "things" we mean more redemptions, more brutal loan remarkings-to-market (not model), more margin calls, we mean the entire toxic spiral that Blue Owl started when it decided it would "be first" and sell before others. 

Even Barclays, which has been marginally bullish on the sector, admitted in its latest private credit report (available here to pro subs) that the market has entered a "cycle of negativity": 

"We would not blame BDC bondholders for beginning to think that the cycle of negativity affecting private BDCs could become difficult to break: a continued adverse narrative causing concern among shareholders of private BDCs prompting them to reduce their allocation, which leads to less financial flexibility at private BDCs as they fund outflows, which causes even more investor concern."

That said, Barclays remains cautiously optimistic on the space writing that it "firmly believes that the actual performance of the underlying investments in BDCs has to matter more at some point. Ultimately, if the credit quality of BDC investment portfolios remains stable – which it has for the majority of BDCs, especially perpetual BDCs – that should temper the impulse to tender shares."  Yet even so, the bank admits that there is "more potential for BDC spreads to widen than tighten over the next few weeks. As such,  we believe tactically, there could be better entry points."

Perhaps Barclays' optimism will prevail. On the other hand, now that we have indeed crossed the tipping point, we are about to face a barrage of BDC Q1 outflow disclosures and as Barclays warns "it is possible for a string of outflow disclosures to hit over the next few weeks, if other BDCs also disclose flows earlier than they have historically. The combination of more concentrated disclosure over a shorter period of time and the likely negative slant of the information could be a headwind to BDC spreads, despite their recent material widening."

Translation: once the panic selling - or redemptions (to avoid the more vulgar term, bank runs) - begins, it never ends without a painful flush. So for those wondering who is on deck for the chopping block, here are the BDCs yet to report Q1 flows:

And while we hope that Barclays is right and the selling eventually abates on its own, a much more ominous - and realistic - outcome was laid out by Rubric Capital's David Rosen in his must-read letter (available to pro subs). According to Rosen, now that the redemption tsunami has emerged, "we don’t think most private wealth investors that have bought shares in private BDCs appreciate how difficult it will be to redeem assets, even in a modest downturn. While public BDCs are permanent capital vehicles, private BDCs require quarterly liquidity for investors, with funds typically able to cap quarterly redemptions at 5% of net assets. Individual investors can redeem 100% of their investment so long as total redemptions are under the 5% cap. If redemption requests are 10% of net assets, investors will be pro-rated by 50%. History shows that as soon as a fund starts to pro-rate, investors should expect severe liquidity restrictions and eventually gates (see Starwood REIT “SREIT”). We expect that as soon as a single bad actor fund pro-rates, redemption queues will get massive across the sector and will lead to severe liquidity issues as funds have no way of selling assets as we explained above."

That bad actor was Blackrock, which gated, pardon, "pro-rated" and did what Blue Owl and Blackstone so desperately tried to avoid, as they too know that once one gates "redemption queues will get massive across the sector and will lead to severe liquidity issues as funds have no way of selling assets as we explained above/"

Rosen was right about that. And that's a problem because his big picture conclusion is that "we think a "run on the bank" is inevitable and would recommend all investors to get out of levered private credit while they still can. This is the story of a $2.0+ trillion market on the precipice."

It may have been on the precipice a month ago when the letter was sent.... but now it is over the Cliff (please pardon the pun, Cliffwater) as the next financial crisis begins.

Much more in the full must read letter by Rubric Capital, (available here to pro subscribers).

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