Wealth managers are beating a retreat from private credit and ramping up a search for alternatives, as they continue to reel from sudden exit restrictions at several major direct lending funds earlier this year.
“The demand for alternatives to direct lending private credit is getting much greater and that is particularly because the wealth distributors do not want to and cannot sell the direct lending private credit retail vehicles any longer,” Christian Stracke, president at Pacific Investment Management Co, said in an interview in Sydney on Tuesday.
Some of the world’s biggest private credit managers were forced to block investors from pulling their cash out of semi-liquid private credit funds known as business development companies in the first quarter, after a surge in concerns about out-sized exposures to software firms threatened by artificial intelligence.
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Many investors are still waiting to get their capital back, and they may not see that money for some time, according to Stracke.
“Most BDCs have a queue of around 15% of assets under management lined up to exit and that’s going to take several quarters to equalize,” he said.
Over $14.5 billion of investor capital is stuck in over a dozen funds, according to Bloomberg estimates and data from Robert A. Stanger & Co published in July.
With $2.26 trillion of assets, Pimco is one of the world’s largest credit investors. Several of its top executives have expressed concerns about the underlying health of the $1.8 trillion private credit sector, where underwriting standards and asset quality have fallen under close regulatory scrutiny in recent months.
Some wealth managers are now changing the wording they use to describe funds investing in private credit and private equity, substituting the term ‘semi-liquid’ for definitions such as ‘conditional’ or ‘periodic’ liquidity, to better prepare investors for future redemption crunches that could leave their cash stuck behind gates.
Stracke also flagged a long pipeline of problem loans sitting in some BDCs, particularly software loans that are maturing in 2027 and 2028. The software sector faces a substantial refinancing challenge in the coming years, with $386 billion of syndicated loans maturing in 2028 and 2029 according to estimates by S&P Global Market Intelligence.
“The industry’s going have to work through those problem loans for the next couple of years,” he said, predicting elevated default rates over the same time-frame. “That’s going to keep people on the sidelines in this space for a protracted period.”
Stracke said the returns on publicly traded sub-investment grade bank loans are often higher than those offered by some private credit managers, and his firm was working with more banks and non-banks to acquire these assets for clients. “It’s very rational that if you’re a retail investor or any investor, you would get out of the illiquid one to get more yield in a liquid one.”
Pimco remains an active investor in public debt issued by some of private credit’s biggest players, including Blue Owl Capital Inc.
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