Amid rising redemption pressure across private credit funds, “there needs to be trust in the system. Blue Owl is under pressure to do the right thing,” said Jérôme Wigny, partner at Elvinger Hoss Prussen. He claimed that Elvinger Hoss was instrumental in developing early European fund structures for major US managers.
Wigny argued that protecting remaining investors in the fund is essential. That means limiting withdrawals to “reasonable levels.” He added, "If the pressure is temporary, some restraint may be needed—ideally without triggering panic and with trust in the manager that the situation will pass.”
A tall order, especially as market conditions are beyond the control of any single manager. This is increasingly evident. More general partners (GPs) such as Blue Owl, Apollo, Blackstone, Blackrock and Ares implemented various forms of restricted redemptions.
Regulatory frameworks: Part II vs Eltif
There is a significant distinction between the regulatory requirements of Luxembourg Part II funds and the newer Eltif framework.
Part II funds offer more flexibility, though they generally limit liquidity principles to a certain percentage of the net asset value (Nav).
Eltifs rules are more prescriptive. Redemptions are strictly permitted only to the extent that the fund maintains a specific “liquidity bucket,” a predefined share of the fund’s Nav reserved for redemptions. If this bucket is exhausted, the manager is not obligated to provide further liquidity. The rule protects investors remaining in the fund.
European-level regulations have prioritised the protection of remaining investors by tying redemptions directly to available cash reserves. Wigny, however, noted that for Part II funds, it is also a requirement to take into account the interests of remaining investors.
The evolution of European fund structures
The European market for semi-liquid private asset funds, often referred to as “evergreen,” “perpetual” or open-ended funds, was largely shaped by US managers seeking to replicate domestic success in real estate and debt markets.
Blackstone, for instance, utilised Luxembourg’s “Part II” funds to launch its initial European offerings, a model subsequently adopted by numerous other American managers. These structures are designed to provide a level of liquidity for assets—such as private credit or infrastructure—that are inherently illiquid.
Liquidity management and redemption limits
A central theme in the management of these funds is the balance between providing investor liquidity and protecting the underlying portfolio. Standard redemption limits are typically set at 2% monthly or 5% per quarter. A 5% quarterly limit equates to roughly 20% of the fund’s Nav annually. “This is a high threshold for funds holding illiquid assets,” said Wigny.
Wigny stressed that investors must distinguish between managers applying existing terms and restricting them through lower gates.
When redemption requests exceed established limits (e.g., reaching 7% when the limit is 5%), the GP could meet these additional redemptions if the fund’s liquid assets so permit. The risk is that investors start worrying if the GP decides at a later stage to apply the limit.
This contrasts with similar challenges in 2022–2023 when Blackstone experienced large outflows from its Blackstone Real Estate Income Trust (Breit), a non-traded, perpetual-life real estate investment trust (Reit). It adhered to its 5% limit in late 2022 even when redemption requests were higher, though it occasionally allowed for more liquidity (up to 7%) to bolster market confidence.
Nowadays most GPs would typically only accept redemptions up to the stated limit. The GP will, in parallel, need to ensure that the fund’s liquidity reserve is sufficient to face future redemptions. The GP has several tools in its toolkit. These include using income (yield/coupons) and subscription proceeds to rebuild cash, selling assets, or even taking out loans to meet liquidity needs.
GPs balance redemptions and fund stability
However, a GP is not legally obligated to meet every request if doing so would require a “fire sale” of assets at a significant discount, which would not be the interest of remaining investors. In that case, the GP might be forced to impose redemption gates that are lower than the redemption limits.
The GP’s primary legal duty is to act in the best interest of all shareholders, with increasing emphasis being placed on protecting those who remain in the fund rather than those seeking to exit. Wigny emphasised that a GP should not be held legally liable for failing to meet redemptions as long as they are not found to be negligent and are acting to avoid harming the fund's overall value.
Redemption runs test fund structures
Wigny acknowledged that the risk of a “run on the bank” is inherent in semi-liquid fund structures. If investor confidence deteriorates, even well-managed funds can face unsustainable redemption pressure.
Such spillover effects can occur when high-profile events—such as the US-based Blue Owl fund freeze—trigger broader anxiety, prompting investors to withdraw from similar products regardless of their individual performance.
The key point is to avoid panic—that is the real risk
In that case, Blue Owl faced scrutiny after suspending redemptions and initiating a return of capital. Wigny characterised this move as a structural shift rather than a temporary liquidity constraint, noting that a similar scenario—combining a fund freeze with capital returns—could also emerge in Europe.
In most instances, he added, “it is a difficult period for both investors and GPs to navigate.”
Patience may preserve investor value
Wigny offered a note of cautious optimism. It may take time, but he argued that selling assets in an orderly fashion may achieve the best possible outcome. Investors may feel uneasy because they cannot redeem and the process can take months or even years. However, he argued that managers often end up selling at the right time and at better prices. “The key point is to avoid panic—that is the real risk.”
For a large name like Blue Owl, the stakes are high—and so is the scrutiny. “This is where trust in the system matters,” argued Wigny. They may lose clients—unhappy because they cannot access their cash immediately or must wait longer than expected—but “by doing the right thing, they increase the chances that investors will ultimately recognise the value preserved and invest again in the same strategy or another one in the future.”
