Yesterday, Jeff Levin experienced it first-hand. As CEO of Morgan Stanley’s BDC, he got the opportunity to press the magic button as the vehicle began trading, under the ticker MSDL (no prizes for deducing that acronym). It was a long time coming — the BDC has been eyeing a public listing since as far back as 2020, as 9fin reported yesterday. 

It’s the path taken by Palmer Square last week, and Churchill this week, and soon to be followed by Blue Owl.

There’s plenty of history of BDCs going public, but in the past two years or so the market went quiet. The last BDC to list was Blackstone, which took one of its vehicles public in late 2021. 

Instead, private BDCs have all been the rage. Near enough every household name in private credit has launched some kind of non-traded BDC in a big move to win over retail investors. 

It makes sense: Hamilton Lane’s latest report on private markets estimates that there is $86trn of capital among high net-worth individuals, but very little of it has been invested in private markets. HNWI is enough of a target that Ares and Briarcliffe sponsored an educational course on private credit for wealth advisors (my colleague Sami Vukelj took it last year).

Over recent months, market conditions have improved significantly for BDCs. Many have seen their stock prices rise over the last few months, and are now trading at a premium to net asset value. 

So it follows that managers of private BDCs will be considering pulling the trigger on an IPO. For the last two years the IPO market has largely been shut, although there is hope 2024 is the year it opens back up.

The rush for retail money has been a big trend in private credit lately. And if there is anything that makes most sense to retail investors, it is stocks. If you can do it instantly through an app on your phone, the appeal is very strong. 

Quite how you make middle-market direct lending sexy to a new generation is a different question, but maybe it’s possible if headlines calling it one of today’s “hottest investments” continue to appear. Perhaps one day Gen Z will embrace mid-western HVAC credit. 

Liquidity

Private credit is an illiquid asset class, but at the fund level it seems to be getting more liquid each day. 

People have been able to trade BDC shares for decades, but large institutional investors have not had the same level of freedom. Big LPs are often locked into closed-end funds for seven to 10 years. 

No more! As the burgeoning secondaries market in private credit is showing, there is a big buyer base for LP stakes these days.

So, if you’re Wallgreens Boots Alliance and you want to revive plans to sell off a division — and help smooth that process by offloading pension scheme assets — you can! As 9fin reported last week, the Boots pension fund has sold its stake in a Goldman Sachs private credit fund.

The stake was sold to Coller Capital, one of the biggest players in the secondaries market, at 96 cents on the dollar — not a bad price for the secondaries market, where discounts are typically in the 85 to 95 range. 

Secondaries have been getting increasingly popular in private equity, which makes sense in the current environment: exits are hard to come by and LPs want their money back. 

Private credit secondaries could follow a similar trajectory. We’ve covered a couple of other stake sales recently, in funds managed by Brightwood and Neuberger Berman, and a multitude of emerging state laws around ESG (such as in Maine) could force more LPs into the market.

Fundraising

Towards the end of 2023, a survey from Coller Capital concluded that a sizeable chunk (44%) of the 110 LPs surveyed were keen on increasing their allocation to private credit. That was in contrast to hedge fund and real estate investments, where they wanted to reduce their position. 

That said, fundraising sentiment has definitely cooled in the last couple of years. The 2023 fundraising total of $199bn was down from $208bn in 2022, and $243bn in 2023. That decline cuts against the “golden age” narrative for private credit slightly.

There are some encouraging signs that this year might be better, though. This week, the City of Fresno Retirement Systems (CFRS) set out plans to make private credit 14% of its total portfolio. The pension scheme is aiming to commit $70m this year, per public documents.

It comes hot on the heels that Connecticut Retirement Plans and Trust Funds aims to invest as much $2bn in private credit this year, quadrupling the pension fund’s allocation to private credit, 9fin reported.

Does two LPs upping their private credit allocation count as an uptick in fundraising? Probably not (technically, you need three for it to be a trend!) but it could be the start of something. We’ll check back in a few weeks.