Wealthy investors who piled into private-credit funds have spent months trying to cash out their shares and still can't. Fund managers have sought to reassure them by highlighting the vehicles' ample "liquidity" to meet redemptions and remain healthy.
It would help if everyone could agree on what that word actually means.
There is no standard definition that governs how funds report liquidity. Some calculate the metric aggressively to project strength, while others avoid citing a single headline figure to prevent conflating cash with credit lines.
Access to ready cash is crucial to meet redemption requests. Many of these vehicles -- known as nontraded business-development companies -- face net outflows, taking in less new money from investors than they pay out for redemptions.
Their investments consist mainly of illiquid loans to middle-market companies, making them hard to sell quickly at good prices. Some funds have also lent heavily to software makers threatened by artificial intelligence.
While funds typically cap quarterly buybacks at 5% of shares outstanding, several have seen redemption requests blow past that limit, raising concerns about how long they can avoid a cash squeeze. That makes a fund's readily available cash a crucial measure of its financial resilience.
In a July report, Fitch Ratings said the eight nontraded BDCs it covers have enough cushion to keep paying 5% quarterly redemptions over the next year. Critics warn of deeper structural flaws and fragility.
A July paper by finance professors Chuck Fang at Drexel University and Itay Goldstein and Yao Zeng at the University of Pennsylvania found that "cash buffers and contractual loan repayments are insufficient to meet repeated 5% quarterly redemptions," partly because "inflows tend to decline precisely when outflows rise." They also found that some funds boost end-of-quarter cash balances by delaying share-repurchase payments.
Some funds define liquidity strictly to include only cash plus the undrawn portions of their credit facilities that are available to borrow. Others define liquidity more loosely to include undrawn amounts that aren't immediately available to borrow. Some also include Level 2 assets, which are generally less liquid than publicly traded securities.
Consider HPS Corporate Lending Fund, or Hlend, managed by a unit of BlackRock. Last quarter, it capped redemptions at 5% after requests hit 13%. In a June shareholder letter, it reported $7.2 billion of liquidity as of March 31. That included more than $700 million of cash, $4.9 billion of debt capacity and $1.6 billion of Level 2 assets.
The HPS fund's earlier first-quarter report showed $4.9 billion in unused credit as of March 31, but only $3.4 billion was actually available to borrow. Strict lender formulas limit how much a fund can borrow against its investments. Borrowing capacity can also shrink precisely when funds need cash most if their assets run into trouble.
In addition, the HPS fund cautions in filings that its Level 2 valuations "may be adjusted to reflect illiquidity and/or non-transferability." Unlike Level 1 assets, such as exchange-traded stocks or money-market funds, Level 2 assets lack quoted prices in active markets. They are generally easier to sell than illiquid Level 3 assets, but converting them to cash can take time, especially during market stress.
The HPS fund's actual cash was largely spoken for already, too. It had $703 million on its March 31 balance sheet, but its liabilities included a $611 million payable for share repurchases, which it paid in April.
Different funds define liquidity differently. Blackstone Private Credit Fund, known as Bcred, said in an April shareholder update that it had more than $15 billion of available liquidity as of March 31. Its policy is to include only unrestricted cash, plus amounts available to borrow, and it doesn't count Level 2 assets.
Its March 31 balance sheet showed $2 billion of unrestricted cash, along with a $3.2 billion payable for share repurchases, which it paid in April. The fund last quarter capped redemptions at 5% after requests hit 10%. In a July update, Bcred said its liquidity was more than $17 billion as of June 30, but it hasn't yet filed its second-quarter report with a full breakdown.
At Blue Owl, different funds present their liquidity calculations differently. Blue Owl Technology Income, known as OTIC, cites a definition of liquidity that includes cash, Level 2 assets and amounts immediately available under its credit facilities.
However, Blue Owl Credit Income, known as OCIC, differs by including the entire undrawn portion of its credit facilities. In a July update, OCIC said it had $12 billion of liquidity as of June 30. The quarterly report it filed last week showed the figure would have been about $3 billion lower if it included just the portion that was immediately available to borrow.
A Blue Owl spokesman said OCIC included the full undrawn portion because it could have accessed it by posting more collateral, whereas OTIC lacked that flexibility.
Like the HPS and Blackstone funds, the two Blue Owl funds have capped redemptions and experienced net outflows. In addition, each Blue Owl fund had payables for share repurchases as of June 30 that exceeded its cash. OCIC is among the funds rated by Fitch, while OTIC, Hlend and Bcred aren't.
Of course, the liquidity that matters most to investors is whether they can cash out when they want to. For shareholders waiting in line for the rest of their money, a fund's boast of billions in liquidity is cold comfort.