The $20bn+ exodus from private credit

One thing to start: Britain’s oldest private equity firm, 3i, is making an eye-catching bet that Action, the Dutch retailer and crown jewel in its portfolio, can crack the notoriously difficult US market — just as growth in its European homeland wobbles.

In today’s newsletter:

• Private credit redemptions surge

• Big Law’s hourly rates go on trial

• BlackRock’s stumbles in India

Wealthy private credit investors see themselves to the exit

The dust is only just beginning to settle after a stampede out of private credit in the first quarter. Well, an attempted stampede. The exits were partially closed. 

Investors attempted to pull more than $20bn from a litany of the largest interval funds and business development companies — popular private credit investment vehicles — DD’s Eric Platt reports.

But many of the funds, which manage investment portfolios worth north of $300bn, put up partial gates, pointing to limitations built into the vehicles that allow fund managers to restrict outflows.

In total, more than $11bn was returned to investors seeking the door, with BlackRock’s HPS Investment Partners, Apollo Global Management, Ares Management, Blue Owl, Cliffwater and Morgan Stanley all restricting outflows.*

The withdrawals cut to the intensifying concerns over the private credit industry’s lending to private equity-backed software companies and the uncertainty those businesses face as AI rapidly advances.

It also comes as investors fret over ageing leveraged buyouts that PE firms have struggled to exit, deals that have largely been financed by private credit.

Greg Obenshain, director of credit at Verdad Advisers, said investor flight was often the “first chapter in most credit cycles”.

“Right now, the stress in direct lending is a flow story, not a default story,” he added. “It matters that investors are concerned about private credit, that public BDCs are trading down, and that credit interval funds and non-traded BDCs are seeing redemption requests more than their redemption caps. This is how the default story begins.”

The outflows have been closely monitored by analysts on Wall Street, who have taken the axe to growth expectations of the major private investment firms. Shares of Blackstone, Apollo, KKR, Ares and Blue Owl are all down more than a fifth this year, slicing into the wealth of some of Wall Street’s most powerful players.

Executives that limited withdrawals have argued that the caps protect investors choosing to remain in the funds and prevent any fire sale of assets. DD notes that it’s unclear how easy it would be for a private credit manager to sell their investments, given loan contracts often require consent from other parties in the transaction.

Alongside the letters to the wealthy investors who poured into private credit funds recently, some managers have launched their own public relations campaigns to try to counter the negative narrative around the downturn private credit is facing. Look no further than Blackstone’s latest insight: “Private Credit: Myth vs. Fact”.

The messaging hasn’t stopped the exodus. Daniel Fannon, an analyst at Jefferies, noted that “though managers have consistently asserted that their portfolios do not have underlying credit issues, this has not dissuaded retail investors from lining up to get their money back”.

*The FT tracked more than a dozen of the largest private credit funds pitched to wealthy individuals, but the overall outflows are likely higher, given the long list of funds in the market.

A Brazilian billionaire vs the skyrocketing cost of a lawyer 

The adage that in a long legal battle the only real winners are the lawyers, is facing a novel challenge. 

On Wednesday, a Brazilian billionaire won a review of the $35mn in legal fees he was charged by US law firm WilmerHale.

Alberto Safra, the son of Joseph Safra — once the “world’s richest banker” — does not appear to be short of a penny or two himself. But he is contesting the “remarkable” amounts billed by his lawyers on a multibillion-dollar estate feud involving his late father’s inheritance.

The invoices included more than $162,000 on one day alone in 2023, while one lawyer working for one month in 2024 cost Safra nearly $700,000.

The judgment, published by London’s High Court this week, gives a rare glimpse into the fees charged by the world’s top law firms. When Safra instructed WilmerHale in 2022, the firm quoted partner rates as high as $2,100 an hour.

US law firms’ hourly fees have exploded in recent years, driven by high interest rates and a pick-up in dealmaking. Some American outfits now charge closer to $3,000 an hour, people with knowledge of the situation told the FT.

While the judge did not take issue with the rates per se, stating that they were “comparable with other advisers instructed by” Safra at the time, he was more critical of the law firm’s lack of communication about the charges.

“I have not previously encountered a case in which such levels of costs accrued with such limited information being provided to the client,” costs judge Colum Charles Leonard said in his ruling.

BlackRock struggles to crack the Indian market

During a shared car journey three years ago, Larry Fink sealed a pact with Asia’s richest man to bring BlackRock back to India.

The deal raised expectations of major disruption in the country’s fund management industry and the sort of upheaval Mukesh Ambani wrought on the telecoms market a decade ago after instigating a fierce price war.

After exiting a previous partnership in 2018, the world’s largest money manager is making another attempt to enter India’s $900bn mutual fund industry, which has expanded almost threefold in the past five years as more families channel savings into equities.

BlackRock has relocated executives to Mumbai and launched a batch of India-based funds under a 50-50 joint venture with Jio Financial Services.

Appearing on stage with Ambani at a Mumbai conference centre owned by the tycoon in February, Fink urged Indian households to plough more of their money into the markets. 

“If you believe in the era of India, we need to compel hundreds of millions of Indians to invest alongside the growth of India,” said Fink. “That will transform India in so many ways.”

Yet early expectations of industry recalibration have proved premature. JioBlackRock’s assets under management have slid 1.7 per cent to Rs175bn ($1.9bn) at the end of February, since the initial launch of three funds in July last year. 

Competition remains strong from established asset managers backed by major domestic banks with extensive distribution networks. More than 70 per cent of investments still flow through intermediaries. 

For most Indian retail investors, “their state of mind is that either they are fearful or they are just following the crowd”, said Dhirendra Kumar, chief executive of Value Research.

Job moves

• Ares has hired EG Morse as head of Asia credit. Morse was most recently co-head of China at Goldman Sachs.

• Rene Haas, the chief executive of UK chip designer Arm, is in line to lead a swath of SoftBank Group’s international business.

• TPG has appointed William McRaven to its board as an independent director. The retired US Navy admiral is a senior adviser at Lazard.

• Yorick van Slingelandt is leaving Moelis & Co, where he’s head of Europe and Asia, Financial News reports.

• NatWest has hired Nick Rodolakis as head of funds and sponsor coverage. He joins from Jefferies.

• White & Case has hired Jennifer Cheng and Andrea Basham as M&A partners in New York. Cheng joins from Reed Smith and Basham joins from Freshfields.

• Latham & Watkins has hired Sarah Lightdale as a securities and M&A litigation partner in New York. She rejoins the firm from Cooley.

Smart reads

Artistic value Bill Ackman is betting that financial engineering can revive the world’s biggest record label with his €55bn bid for Universal Music, the FT reports. But sceptics say reshaping the company’s balance sheet won’t necessarily address the challenges it faces.

Dollar weakness The power of the dollar as a weapon is waning, Daniel Davies writes for FT Opinion. Sanctions haven’t stopped Iran from selling oil or charging ships to traverse the Strait of Hormuz, as economic warfare has taught US adversaries to find workarounds.

Getting old People are living longer than ever before, but it’s not clear that’s such a good thing, Simon Kuper writes for FT Magazine. Longer lifespans mean more years spent in poor health, while technology threatens the parts of life that make it worth living.

News round-up

Adidas set to lose Champions League ball contract to Nike after 25 years (FT)

OpenAI halts Stargate UK data centre project (FT)

BDO axes 31 partner roles as AI pressure grows and profits fall (FT)

7-Eleven owner delays US listing in blow to turnaround plan (FT)

Unilever acquires vitamin gummies brand Grüns in wellness push (FT)

US justice department opens investigation into NFL (WSJ)