Investors tried to pull $13 billion out of private credit funds this quarter. They got less than half. For many crypto investors, if the collapse of private credit continues, half could end up being a good outcome.
Seven private credit giants capped investor withdrawals this quarter, including Morgan Stanley, BlackRock, Apollo, Blue Owl, Cliffwater, Blackstone, and Ares. Oaktree almost joined that group, although it technically fulfilled its 8.5% in withdrawal requests by having parent Brookfield buy 1.7% of shares at the eleventh hour.
Private credit funds package up illiquid loans inside vehicles that typically go up, except during rare times of crisis, such as during a major war or mass job losses.
They also typically limit quarterly withdrawals to 5%, which is not a problem until many people want out, like they do now.
When more than 5% want to withdraw, everyone gets a haircut on their withdrawal request. At Apollo and Ares, 11% wanted out. Those funds returned less than half.
Crypto started joining the private credit bandwagon years ago, selling similar products in a different wrapper. Many stablecoin and altcoin treasury managers invest in private credit directly.
‘A quasi run on the bank’
Michael Saylor delivered a keynote at the Blockworks Digital Asset Summit on March 26, the same week Apollo and Ares gated withdrawals. He pitched his company’s dividend-paying stocks as competitors to private credit.
Saylor even called the multi-trillion dollar private credit crisis this year “a quasi-run on the bank.”
Worse, the same companies gating traditional private credit withdrawals are tokenizing private credit on blockchains. Apollo launched ACRED, a tokenized feeder into Apollo’s Diversified Credit Fund. A few months after that launch, Apollo’s partner Securitize had built sACRED, a derivative to goose yields even higher through risky decentralized finance (DeFi) protocols.
Holders can buy ACRED, deposit it into DeFi vaults, borrow stablecoins, buy more ACRED, and loop. Yields after looping, which are tantamount to risk, soared.
Securitize initially advertised daily redemption rights for ACRED holders, which was quite curious given that most private credit funds limit quarterly redemptions to 5%. Then, after crypto publication Unchained asked about the mismatch with the fund’s quarterly 5% cap, Securitize quietly removed daily liquidity rights.
Easier to buy, just as hard to sell
In other words, crypto tokenization changed the speed at which people could buy and add leverage. It did not change the speed at which they could sell.
Nor did crypto improve the most important characteristic of private credit: the deteriorating credit qualities of US borrowers who are suffering higher fuel prices, AI-induced job layoffs, wartime uncertainty, inflation, and rising costs of living.
Crypto sold versions of the same illiquid debt that investors cannot exit quickly in any environment, let alone the current “quasi run on the bank” reality.
By one analyst’s count, tokenized private credit surged from $25 million to $6 billion over the last year.
Read more: Bitcoin mortgages debut with 60% haircut and no margin calls
Using blockchain for private credit instruments merely extends leverage and the rehypothecation chain that amplifies losses in a market downturn.
Goldfinch, a DeFi protocol for undercollateralized real-world lending, has already suffered three defaults totaling $18 million. The most recent default wiped out more than 7% of its active loan book.
A bad loan is still a bad loan, even if a smart contract wraps it in a token.
Billions queued up to leave private credit
Apollo Debt Solutions, valued at about $15 billion, received redemption requests for 11.2% of its shares. It enforced a 5% cap and returned $730 million of $1.5 billion requested. Ares Strategic Income Fund faced 11.6% in requests and did the same.
Blackstone recorded a record 7.9% in requests totaling nearly $4 billion. It raised its cap to 7% and injected $400 million of its own capital. BlackRock’s $26 billion fund received $1.2 billion in requests. Cliffwater’s $33 billion fund saw the worst: 14% demanded back.
Across roughly a dozen funds, about $4.6 billion in investor capital remains trapped.
Blue Owl Capital is the poster child of the current crisis in private credit. The company permanently halted redemptions from its retail-focused Blue Owl Capital Corp II in February. Its stock has declined 42% since the start of the year and 60% over the past twelve months.
Smelling blood, a shark investor launched a tender offer for 6% of Blue Owl Capital Corp II at about 65 cents on the dollar.
“All you need is for the snowball to start rolling down the hill, and it has begun,” the investor said at a recent investment conference.
Crypto credit risks
Federal Reserve Chair Jerome Powell addressed private credit on March 30 at Harvard University. He called it a correction, not a systemic event.
Nonetheless, Powell’s contentious reassurance arrived the same week that DZ Bank, Germany’s second-largest lender, warned that private credit could trigger a chain reaction with severe negative effects for the US economy.
A record 63% of fund managers surveyed by Bank of America identified private equity and private credit as the most likely source of the next wave of systemic bankruptcies.
Default rates would tend to agree. The private credit default rate reached 5.8% through January 2026, the highest since Fitch’s index launched. Morgan Stanley forecasts it will climb to 8%, more than triple the historical average. UBS has warned that severe AI disruption to software borrowers could push defaults to 13%.
Software exposure is the fault line. About 26% of direct lending loans went to software companies. Many built business models on costly subscriptions that AI is now undermining. Blackstone’s flagship BCRED fund posted its first monthly loss in three years in February after marking down loans.
Wall Street spent years pitching private credit as institutional-grade yield, and crypto wanted to democratize and decentralize it. What they actually democratized and decentralized was the purchase of opaque, illiquid loans by retail investors with 5% quarterly redemption limits whose fund managers choose the valuations of their own assets with broad discretion.
As Protos has previously reported, this type of opacity in financial products is a feature, not a bug. Now those investors want their money back. The funds are returning less than half.
Powell says it is not systemic. About two thirds of private fund managers disagree.
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