A Spike in Private Credit Redemptions is Squeezing Lenders

Individual investors are taking their money out of private credit investments. About 5% of shareholders from some of the biggest private credit funds requested their money be taken out at the end of 2025.

One private credit fund managed by Blue Owl received redemption requests equal to around 15% of its shares, The Wall Street Journal reports.  

What is causing individuals to cash out of a private credit fund? It may be as simple as the fund underperforming in the eyes of investors.

“These investors get really surprised when their dividends go down,” said Robert Dodd, an analyst at Raymond James, told The Wall Street Journal.

Others point to a recent number of corporate bankruptcies such as Tricolor spooking investors. Whatever the reason, investors are exiting private credit funds.

Private Credit Funds Still Popular With Investors

Money managed by business development companies (BDCs), a type of private credit fund, has tripled since 2020 to about $450 billion, according to The Wall Street Journal. These funds took in more money from new investors than was paid out to investors leaving the funds at the end of last year.

How Private Credit Affects Lending

First off, private credit is now big enough to matter to credit markets. In fact, private credit has become a major part of non-bank lending. The growth of private credit means any development in the sector will have an impact on credit availability and pricing, two things that matter to lenders and consumers alike. 

How Funding Plays A Part

Many subprime lenders use private credit funds for their funding. Unlike bank loans that get their funding from customer deposits, private credit funds rely on capital commitments from their investors. So to sum up, subprime lenders get funded by private credit funds that are in turn funded by investors. 

Redemptions Hurt Loan Availability

When a large number of investors cash out their money at the same time, private credit funds may be forced to raise their redemption limits or borrow cash to meet redemption requests. 

This causes a disruption in how the fund manages credit and may cause lenders to be less able or less willing to make new loans. 

In addition, liquidity pressures may lead to tighter lending standards, a decrease in new credit, and a demand for higher interest rates from borrowers.

Increase in Customer Exits May Cause Snowball Effect

When a large number of individual investors leave a private credit fund, the fund may struggle to meet redemption demands. Not meeting redemptions could cause a lack of confidence in current investors causing some to leave. 

Changes in yields and dividends also influence investor exits. As yields fall and dividends decrease, this could lead to even more investors pulling their investments. 

“I think this will be a test for the industry,” said Peter Troisi, an analyst at Barclays, to The Wall Street Journal. ”We’re in an environment where BDCs are still seeing inflows even though they are simultaneously seeing outflows…and the concern is whether the redemptions became cyclical and there’s a snowballing effect.”

Lenders Face Performance Pressures

Redemptions in private credit funds are often tied to lower than expected income from loans. When loan performance decreases, this can lead to tighter credit terms for new loan customers, the renegotiation of current loans, and risk repricing. 

The Bottom Line

At the end of 2025, a large number of Individual investors cashed out from private credit funds. A key reason was underperformance of the funds. Private credit funds are a big part of non-bank lending. And many subprime lenders use private credit funds for their funding.

When there is bad news in a private credit fund, it ripples out and affects lenders hurting loan availability and liquidity. When loan performance decreases this may result in stricter credit terms, renegotiating of current loans and repricing for risk.