Australian private credit investors say they are concerned souring sentiment that has hit some of the biggest global players such as BlackRock and Blue Owl Capital will spread to Australian funds despite few immediate problems in the assets underpinning the lending.

A growing number of large private credit funds in the United States and Europe restricting or denying redemption requests over fears that default rates will increase, particularly in loans made out to software companies exposed to the growth of artificial intelligence.

Blue Owl’s New York head office. The firm has become a focal point for concern about private credit funds. Bloomberg

“The key risk for debt [listed investment trusts] is that the market is currently very spooked and every piece of bad news is being magnified,” said Daryl Wilson, the chief executive of Affluence Funds Management, which specialises in listed funds and manages about $55 million in assets.

These funds have become popular, given they advertise higher returns than other fixed-income products like bonds that offer lower risk.

Overseas, many funds have raised warnings about the quality of loans. The price of listed private credit funds in the US has fallen to about 20 per cent below the reported value of their investments, a sign that holders are happy to cut their losses rather than risk further declines.

Funds managed by major asset managers including Blackstone, BlackRock and Blue Owl have all been gated or restricted, with Morgan Stanley and Cliffwater the latest to limit withdrawals on some private credit products.

Morgan Stanley said redemption requests at its $US7.6 billion ($10.8 billion) North Haven Private Income Fund had soared to 10.9 per cent in the first quarter, and it would fulfil 45 per cent of the requests.

In Australia, the $8 billion listed investment trust sector, representing the publicly trading private credit products, is holding up, with an average discount to underlying assets of around 2 per cent.

Wilson said Affluence was avoiding most listed private credit products but buying into two funds managed by Metrics Credit Partners, one of the largest players in the sector. The Metrics funds are trading at significant discounts: the $595 million MOT fund is 17 per cent below its net asset value: and the $289 million MRE fund is trading at a 20 per cent discount.

Wilson said both had high equity exposures to real estate developments, a point of difference with other listed private credit strategies.

A Metrics spokesman said there was increasing interest from investors in Asia and the Middle East in Australian private credit, which was regarded as a less crowded and more stable market than its alternatives.

Darrell Clark, the deputy head of research at Lonsec, which provides research to financial advisors on products like private credit funds, said there were no meaningful signs of stress among local products.

“We don’t see anything fundamentally wrong. It’s natural you will have funds locking up at this point in the cycle, but we’re not seeing anything happening here in the ground,” Clark said.

“When we speak to managers there aren’t any rises in non-accrual rates.”

But Michael Block, the chief investment officer of Bellmont Securities, said he was avoiding private credit in favour of high-grade public bonds.

Investors did not properly understand the risks of private credit and had invested in products that allowed them to pull their money without much notice, even if the underlying assets were difficult to sell, Block said.

“Private credit is mis-sold on the view that it is equity returns for bond-like risk. It is high risk illiquid direct lending which is unrated,” he added, pointing to the US as an example of how a loss of confidence could lead to sharp falls in the value of listed funds even if the assets were in good shape.

Cliffwater is one example. Last year, the company raised $US16.5 billion from investors, outperforming larger private credit specialists such as Blue Owl, BlackRock, Ares Management and Apollo Global Management. In recent weeks, however, it has faced a rush of retail investors who have wanted to redeem funds after becoming rattled by defaults and writedowns.

Investors are particularly worried about exposure to software companies, which have borrowed heavily but found their subscription business models under threat from AI, which allows users to replicate some of their features without needing to have detailed understanding of coding.

This article was originally published in the Australian Financial Review.