“There are more than just two [Blackstone and Apollo]. We’ve actually seen six or seven large investment houses do it,” said a 9fin source active in structuring these vehicles in Luxembourg, a significant European domicile for alternative investments. 

Asset manager Partners Group is one, managing multiple evergreen structures which provide private individuals access to private markets, including private credit. These operate via selected distribution partners, such as wealth managers, according to a second source. 

Another is US asset manager Hamilton Lane, which offers what it calls a diversified evergreen solution through its Global Private Assets Fund. 

However, while the retail investor segment—an important and growing segment of overall alternative asset management demand — is indeed attractive, it presents liquidity and valuation headaches for fund managers.

“One key aspect from a product perspective is liquidity,” said the source. “Sophisticated investors, high-net-worth-individual (HNWI) investors don’t want to wait for the close of a fund’s term to be paid. So these kinds of funds are structured as open ended, with monthly and quarterly redemption and subscription.”

Non-institutional investors in private credit require strategies around valuation, distribution and liquidity management. 

Liquidity strategies

Offering liquidity at a product level is one of the challenges of structuring a private credit fund for non-institutional investors. Fortunately for private credit, cashflow generation is central to the asset, and this makes it a positive candidate for non-institutional investment. 

For income-generating assets, it is possible to match liquidity needs to projected inflows. However, the source concedes that this is not a precise science and there is not yet the deep data necessary to model this. 

Often, cash flows generated from coupons and other payments are insufficient to cover all liquidity needs, so the underlying funds and their underlying portfolio of companies will need a diversified time horizon for reimbursing capital. 

In addition, liquidity modelling can simulate how the asset will behave and provide a baseline of liquidity that the fund can offer. This is also used to model and simulate investor behaviour. 

“The tricky thing is that we can only use proxies for this, as there is no historical (retail) investor base for private credit. We need to create proxies for normal behaviour, proxies for stressed, we need to cluster this by geography, behaviour, etc” said the source.

Lastly, but not least, liquidity pockets representing between 5% and 15% of the total fund to absorb extra redemptions provide extra safety in terms of liquidity. 

Valuation challenges 

Of course, to offer liquidity, assets in the fund need to be subject to frequent valuations — something unheard of in a closed-ended fund. “Contrary to a closed-ended fund, investors are entering funds based on its net asset value,” said the source. “But valuation of assets in private credit is a problem because you can only realise the value when you sell.”

For an open-ended fund, where investors enter and leave over the life of the fund, investor subscription and redemption requires ongoing asset valuation.

This valuation can be performed internally by the fund manager, or delegated to an external valuer. However, as the source pointed out, this is a time-consuming process, requiring a methodology and data modelling. The process can also be subject to independent review to make sure it falls within an acceptable range.

“Your investors have to understand that you might get it wrong, and that valuations might be adjusted up and down,” said the source. “It’s tricky because as a fund manager, you don’t want to get it wrong, and you don’t want to be challenged by retail-type investors.”

How to distribute 

Private credit funds used to onboarding 10-15 large-ticket institutional investors face challenges when distributed to a large, granular base of smaller-ticket retail investors. 

“Asset managers don’t necessarily have the distribution capabilities,” said the source. “There is of course the intermediation of marketing through private banks, wealth managers, etc.”

The second source was quick to point out “there is an important distinction between “retail” investors and sophisticated private investors. What is available to sophisticated private investors might not be available to retail investors.”

Of course there are also onboarding requirements which become more onerous as the number of investors in private credit expand. But with demand from both wealth management and private banking clients not yet met by availability of private credit investment, service providers are sure to position themselves to find a solution. 

Elsewhere in the market 

Unitranches abound, with Pemberton AM providing one for Agilitas’ acquisition of UK recruiter Sanctuary & Seven, and Eurzaeo direct lending providing unitranche for Waterland Private Equity’s acquisition of Denmark’s Shape. 

Also, Keensight Capital has acquired Spain’s Inke with a slice of private debt - watch this space, and Sullivan Street Partners also has debt backing the carve out of Tracerco. Isquared Capital, meanwhile, has acquired recycling business Enva and Astorg private equity has acquired medtech business HG Medical.

As mentioned, Apollo has launched a product platform for wealthy individuals to access the private markets.

Meanwhile, law firm King & Spalding on ARR financings

Partners Group white paper on private credit 

RSM UK on private credit’s dry powder