* Discounts to funds' asset values increase over past

year

* Worries have mounted over credit quality, software

exposure

* Large managers have defended portfolios

By Isla Binnie, Tommy Reggiori Wilkes and Iain Withers

NEW YORK/LONDON, March 12 (Reuters) - Investment funds

run by big financial firms such as KKR and Blue Owl

have seen their stock prices slide in recent weeks as

investors question the quality of the loans the funds have made.

Private credit - lending directly to businesses outside the

banking system - has ballooned into a $2 trillion industry. But

concerns over transparency and lending discipline have rattled

confidence.

The pressure is particularly visible in vehicles open to

retail investors - a group private funds have targeted

aggressively.

WHAT THE NUMBERS SHOW

Publicly traded business development companies (BDC) - a

common way Americans access harder-to-trade assets - trade at an

average of 78 cents for every dollar of reported assets. That's

down from 85 cents at the start of this year and about a dollar

in early 2025, according to research firm Morningstar ( MORN ).

A discount to asset value signals that investors doubt the

assets are worth what the managers estimate.

BIGGEST FUNDS FALL

Most of the 20 biggest BDCs have seen their stock prices

fall relative to asset values over the past year, and nearly all

now trade at discounts. The sector has also been hit by worries

about how artificial intelligence could affect software

companies, a major area of lending.

Examples include: FS KKR Capital Corp ( FSK ) at 51 cents per

dollar of assets, Blue Owl Technology Finance Corp ( OTF ) at 68

cents, and Prospect Capital Corporation ( PSEC ) at 44 cents,

according to Raymond James data published on Monday.

Carlyle's Secured Lending fund trades at 68 cents

and Blackstone's Secured Lending Fund at 88 cents. Even

the biggest BDC - a $31 billion fund run by Ares Management ( ARES ) -

trades at 94 cents on the dollar.

The companies declined to comment or did not respond.

Larger managers say their portfolios remain stable despite

market volatility, though some have acknowledged strains.

Executives at KKR and Blackstone funds said in February that

some borrowers are struggling.

Morningstar's ( MORN ) Jack Shannon said investors appear to believe

the sector's "best days are behind it" after rapid growth

"forced firms to compete" by offering higher returns or easing

lending protections.

WHY THIS MATTERS

Falling stock prices signal rising pessimism. Evercore ISI

analyst Glenn Schorr said the discounts now reflect fears of a

recession and higher loan losses.

Non-traded BDCs, which let investors redeem a portion of shares

each quarter, are also under pressure, with several limiting

withdrawals.

On Wednesday, Morgan Stanley said it had limited redemptions at

one private credit fund after investors sought to pull out

almost 11% of outstanding shares. BlackRock ( BLK ) recently

capped withdrawals at a major fund, while Blackstone's flagship

fund saw a surge in withdrawal requests in the first quarter.

Blackstone President Jon Gray said that large institutional

investors such as pension funds - which typically commit money

for longer periods - continue to put money into private credit.

JPMorgan has cut the value of some private credit loans after

assessing the impact of volatility around software companies,

sources told Reuters this week.

GROWING ASSETS UNDER MANAGEMENT

Private credit continues to expand, with forecasts pointing

to further growth. Law firm Eversheds Sutherland estimates

around 50 traded BDCs hold more than $150 billion in assets

between them, and more than 100 non-traded BDCs hold another

$270 billion.