Cliffwater says some private credit fund returns will be lower in Q1

By Isla Binnie

NEW YORK, April 1 (Reuters) - Private asset manager Cliffwater told investors on Wednesday that first-quarter returns for some private credit funds were eroded by higher debt costs, as the industry grapples with questions over lending standards and valuations.

In a note emailed to investors and seen by Reuters, Cliffwater said it expected higher interest rates on new private loans in the near future.

"While this improves forward return potential, it also creates near-term pressure on existing holdings, as wider spreads translate into lower marks," Cliffwater said.

Private credit funds assign marks, or valuations, to the loans they invest in and many disclose those in regulatory filings soon after the end of each quarter.

A representative for Cliffwater declined to comment.

Lenders are likely to demand an extra 50-75 basis points in the near future, Cliffwater said.

Cliffwater manages a $33 billion interval fund, a form of private credit vehicle popular with wealthy individuals. It received requests to redeem about 14% of its shares in the first quarter, and capped those withdrawals at 7%.

Another flavor of private credit vehicle, a structure known as a business development company (BDC) has suffered in recent months. Investors have stepped up withdrawals from non-traded versions and forced down the market prices of traded versions.

Cliffwater said it expected "lower Q1 returns for higher-levered vehicles, particularly BDCs." It said interval funds were producing superior performance so far this year.

Cliffwater's interval fund invests in BDCs.

Fears that artificial intelligence could upend the business models of software companies have weighed on the private credit firms who have lent to them.