- Cliffwater’s $31.6 billion Corporate Lending Fund owns stakes in Blue Owl’s OCIC and Ares Strategic Income Fund — both of which are now capping redemptions at 5% of shares outstanding — yet Cliffwater still carries those holdings at full reported NAV on its own books
- Accounting rules permit funds to use another fund’s official NAV even when that holding cannot be fully redeemed at that price — creating a legal but economically misleading valuation shortcut that is now under intense scrutiny
- Cliffwater itself is facing heightened redemption pressure: requests hit 14% in the latest period and the fund agreed to repurchase 7% — well above its usual 5% cap — signaling that the stress is cascading up the fund-of-funds structure
- The wave of redemptions is “starting to resemble a stampede,” per WSJ’s Heard on the Street — and the accounting flexibility that lets managers avoid marking down gated holdings may be accelerating investor distrust and exit requests
What Happened?
A Wall Street Journal analysis has identified a structural accounting problem at the heart of private credit’s redemption crisis. Cliffwater’s flagship Corporate Lending Fund — with $31.6 billion in net assets at year-end — holds stakes in two other private-credit funds that are now gating investor redemptions: Blue Owl’s Credit Income Corp. (OCIC), which capped buybacks at 5% after investors sought to redeem 21.9% of shares outstanding, and Ares Strategic Income Fund, which also capped redemptions at 5% after requests exceeded 11%. Yet Cliffwater continues to carry both holdings at the full NAVs reported by those funds’ own managers — $151.2 million for the Blue Owl stake and $104.9 million for the Ares stake — rather than adjusting for the fact that those holdings cannot be fully sold at those prices. Cliffwater’s CIO Blake Nesbitt said no adjustments have been made for gating, though the fund makes other timing-related adjustments. Meanwhile, Cliffwater itself is now facing redemption requests equivalent to 14% of its assets — and agreed to repurchase 7%, above its standard 5% cap.
Why It Matters?
The accounting issue cuts to the credibility of private credit’s entire valuation framework. When a fund holds a stake in another gated fund and marks it at full NAV, the reported value no longer reflects what an investor could actually realize — creating a flattering but misleading picture of portfolio quality. Accounting rules allow this through a “practical expedient” exception designed to let funds use other funds’ official NAVs as a shortcut when they lack the information to make their own fair-value measurement. But the rules only require managers to “consider” whether an adjustment is necessary — not to make one. This discretion, which once seemed like a reasonable administrative accommodation, now creates a perverse dynamic: fund managers have a financial incentive to avoid markdowns (which would trigger more redemptions) even when gating makes clear that the official NAV exceeds the realizable price. The knock-on effect in a fund-of-funds structure like Cliffwater’s — where 28% of assets are in other private vehicles — is that valuation uncertainty cascades through multiple layers, and investors have no reliable way to assess the true liquidation value of what they own.
What’s Next?
The Cliffwater situation illustrates why the private-credit redemption wave is self-reinforcing: the more investors suspect that official NAVs are inflated, the more they rush to redeem before others do, and the more gating events occur to confirm their suspicions. Boaz Weinstein and other short-sellers are actively hunting for opportunities to exploit the gap between official NAVs and realizable values. Regulators, including the SEC, have been watching the BDC structure with increasing concern, and the current wave of redemptions may accelerate formal guidance on when gating-related NAV adjustments are required rather than merely optional. For investors still holding private-credit positions — particularly those in fund-of-funds structures — the key question is not what their official NAV says today, but what portion of that value can actually be accessed, and on what timeline. In a worst-case scenario, cascading gating events across an interconnected web of private-credit funds could result in a prolonged, painful deleveraging cycle that plays out over many quarters rather than weeks.
Source: The Wall Street Journal
