The U.S. private credit industry is experiencing a wave of redemptions, with giants like Cliffwater embroiled in a chain reaction crisis. The core issue lies in the fact that while underlying funds impose redemption restrictions, upper-tier funds continue to value assets based on inflated 'official net asset values,' causing a severe disconnect between book values and market realities. This loophole in accounting standards has triggered a profound trust crisis, potentially accelerating a market rout and leaving investors facing total losses.
A chain reaction is unfolding within the U.S. private credit fund industry as a redemption wave emerges, bringing to light a crisis of confidence regarding the authenticity of asset valuations.
According to a report by The Wall Street Journal, Cliffwater's flagship private credit fund recently faced a surge in redemption requests. This fund also holds shares in other private credit funds that are under significant redemption pressure, including products managed by Blue Owl Capital.
As previously reported by Wall Street Wisdom, Blue Owl announced this week further restrictions on redemptions for one of its funds, resulting in investors seeking to exit receiving less than a quarter of their requested amounts.
This situation has pushed the entire industry into a fundamental valuation dilemma: When a fund cannot fully redeem its holdings in another fund, can it still book the position at the latter's officially reported Net Asset Value (NAV)? Current accounting rules permit this practice, but critics argue that it creates a systemic divergence between book values and market realities, further eroding investor confidence and accelerating redemption stampedes.
NAV Exception Clause: A Regulatory Loophole or Practical Shortcut?
Accounting standards generally require funds to measure their holdings in other funds at "fair value," which reflects the price that market participants are actually willing to transact at. However, the rules include an exception clause for investors holding private equity fund shares—allowing them to directly adopt the official NAV disclosed by the underlying fund. The legislative intent was to address the lack of information needed for independent fair value assessments, making the use of official NAV a pragmatic simplification.
The issue arises when a fund has explicitly reduced redemption quotas, creating a significant discrepancy between its official NAV and the amount investors can actually liquidate. Under current rules, fund managers are required to "consider" whether adjustments are necessary if they know the NAV data is outdated or flawed, but the rules do not mandate any substantive action—the obligation is limited to mere "consideration."
This gray area is being increasingly exploited. Other investment funds have even utilized this loophole in starkly different ways: purchasing private equity fund shares at steep discounts on secondary markets and subsequently marking up the holdings to the official NAV, with some cases reporting over 1,000% paper returns in a single day.
Cliffwater's Chain Reaction Exposure
The Cliffwater Corporate Lending Fund serves as a quintessential example of this valuation dilemma. As of the end of last year, the fund had net assets of $31.6 billion, with 28% of its portfolio allocated to other private investment vehicles, all valued based on NAVs provided by the respective fund managers.
As of December 31, 2025, within its known holdings, Cliffwater holds approximately 16.2 million shares of OCIC, with a book value of $151.2 million, which is about 1% higher than cost, based on the official NAV provided by Blue Owl. During the same period, the fund also holds around 3.8 million shares of Ares Strategic Income Fund, with a book value of $104.9 million, approximately 5% higher than cost, also measured using the official NAV. Subsequently, the Ares fund has reduced its redemption cap to 5% of its outstanding shares, while shareholders' redemption requests exceeded 11%.
Blake Nesbitt, Chief Investment Officer of Cliffwater, stated in an interview that to date, Cliffwater has not made adjustments to the NAV in response to non-traded BDCs failing to fully honor redemption requests. He also noted that Cliffwater updates its NAV on a daily basis and regularly adjusts for other factors. Nesbitt further revealed that Cliffwater has not increased its holdings in either of the two funds this year—its OCIC position began in 2021, while its Ares fund position started in 2022.
Credibility of valuation questioned
Although the combined holdings of OCIC and Ares account for only a small fraction of Cliffwater's fund assets, their signaling significance cannot be underestimated: once investors realize that the NAV of certain holdings significantly diverges from market realities, there is reason to cast broader doubt on the reliability of similar holdings.
Private credit managers have already faced multiple pressures, including concerns over their exposure to vulnerable software companies, opaque information disclosure, and subjective asset pricing. The redemption request rate for OCIC reached 21.9%, itself a strong signal that investors believe its official NAV is inflated.
For ordinary investors, the current dilemma lies in this: under the existing accounting framework, funds are entitled to price their holdings based on another fund’s official NAV, even if such pricing clearly deviates from actual realizable value. This means that the book figures across the entire investment chain may not reflect true conditions, and other asset valuations reliant on NAV could also be eroded by hidden pricing discrepancies.
The wave of redemptions in private credit funds is evolving into a stampede-like scenario. Meanwhile, the current rules allowing managers to autonomously select valuation benchmarks are providing additional motivation for investors to accelerate their exit.
Editor/Lambor