And seemingly the results have been mixed so far, as 9fin reported retail investors are under-allocated in private markets. KKR notes the 60/40 model is under pressure and that a 40/30/30 model that incorporates private credit, equity and real estate into portfolios is the way forward for best risk-adjusted returns.

Private markets have boomed since the global financial crisis and to some extent individual investors have been locked out of this trend. This is despite them also being affected by the era of low interest rates in the same way as institutional investors and being pushed into a search for yield. 

Anyone who is anyone in private credit today has a BDC, listed or unlisted as they attempt to open the door to retail investors. Ares, Apollo, HPS, Blackstone are some of the biggest names in private credit to launch a private BDC over the last couple of years. And it is no different across the pond as big names Antares and Arcmont look to win over wealthy European investors to their own vehicles, 9fin reported.

Rug pull

Private BDCs are open to most investors, unlike traditional closed-ended funds that are restricted to institutional investors. To be eligible for a private BDC you must either have a minimum net worth of $250,000 or an annual income of $70,000 with a $70,000 net worth. Of course, anyone is free to purchase shares in listed BDCs on the open market.

If you want out, you can make that decision on a quarterly basis. The manager will pay out shares equal to the value of the net asset value per share of the fund. There is, however, a 5% limit on the total BDC’s shares that can be redeemed.

Blackstone’s private BDC, BCRED, has attracted a lot of cash since its launch in January 2021, today sitting at around $48bn in size. What transpired late last year, however, is that a number of investors bolted for the door as soon as the macro-economic environment got a little choppy. The BDC hit the 5% redemption limit. 

"To me, the bigger issue with retail entering this space is flows,” wrote Scott Roberts, senior managing partner at placement agency Belvedere Direct Lending Advisors, in an email to 9fin. “When the market is hot, they want in. When volatility pops up, they rush for the door.”

“It’s herd mentality at its worst. That’s the biggest issue facing the industry: how to deal with the knee jerk reaction of retail whims,” he added.

Deal appetite

If there has been one big story in private credit over the last few years, it is the push towards doing ever larger financings. 

Even with Cotiviti’s loan collapsing and Finastra’s yet to be completed, we have a clear marker that the market can absorb a deal above $5bn. And it’ll perhaps be no surprise that private credit lenders talk of even bigger deals. Private credit firms eat and then get hungry.

To make this happen the money has to come from somewhere. Unlike banks, private credit firms don’t take deposits, but third-party capital, such as pension funds, insurance companies, sovereign wealth funds, endowments and family offices all have enthusiastically embraced the asset class.

Retail money however is less sticky than institutional money. And while it still only makes up a small part of the investor base in private credit, if the dynamic of chasing retail money continues then redemptions may become a more pressing concern if a recession plays out and retail investors head for the exit.

As a result, lenders may look to reduce their ticket sizes on deals. This was a dynamic that played out during Covid-19 and in the second half of last year, whereby hold sizes in individual loans were dialed back. Lenders hunkered down as the wider economic environment suddenly got a lot more risky post-Russia’s invasion of Ukraine.

Yet with some investors thinking a peak federal funds rate is coming soon, it’s possible new money LBOs will pick up again. If we’re still likely to be in a choppy macro environment, lenders will want to pounce on the best assets and throw their hat into the ring without any constraints on capital. 

“The expectation is that rates will potentially come down over the next 12 months, so if you’re a sponsor you can see the end of the tunnel as far as what debt costs are going to look like,” said Larry Klaff, head of asset-based loans at First Eagle Alternative Credit, in an interview with 9fin. 

“So they can make the decision today knowing that they’re probably going to pay more for the next 12 months until rates start to normalize a little bit,” he added.