(Bloomberg Opinion) — Nor collection of funds from pension funds and endowment funds slows down, private loan managers have set their sights on wealthy individuals. The success of the $54 billion Blackstone Private Credit Fund, which launched less than four years ago, prompted companies like Blue Owl Capital Inc. create their own versions. And they are setting high growth targets. Ares Management Corp., for example, is planning to expand its assets under management by almost 75% to $750 billion by 2028, with a good portion of the money expected to come from retail.
Field to mini-millionaires it's simple — they don't need to worry about the extreme swings of public markets. But is the $1.7 trillion industry ready for a new clientele that may be edgier and more willing to air their grievances publicly if a fund's performance is poor?
To lure private wealth, the new funds are allowing people to withdraw money at regular intervals, as opposed to more traditional closed-end structures where institutional investors' capital is locked in for the life of the fund, which can span a decade. Stakeholders in Blackstone Inc.'s private credit fund, for example, can redeem up to 5% of total net asset value each quarter, subject to board approval.
However, there is a question of whether it is a good idea to sell illiquid investment strategies to a group of people who are not as patient as, say, funds of funds. Blackstone's real estate trust for wealthy individuals spent a good part of 2023 inhibition of withdrawals and assuring shareholders that this strategy “worked as intended.” Last week, Starwood Real Estate Income Trust's decision to reduce repayments and avoiding property fire sales was another reminder that individual investors hate to see their money locked up for too long.
Granted, private equity funds are in a much better place than real estate trusts, which are saddled with higher mortgage costs and a global slump in commercial property. However, market stories can change overnight and a soft landing may not happen. Companies are failure to the highest degree since the global financial crisis, according to S&P Global Ratings. This will necessarily test the viability of private credit funds.
More dark clouds are on the horizon. After two years of giving ground to direct lenders, the banks, which are the gatekeepers of the public debt markets, are striking back. To win deals, private loan managers are offering cheaper loansthus hurting their portfolio returns.
There is also the issue of fees. While a plain vanilla passive fund may cost nothing, investing in private credit vehicles is dear. Management fees range from 0.5% to 2%, and funds can earn another 10% to 15% if they pass predetermined hurdles. With the S&P 500 up 11.7% for the year, do wealthy individuals still want to stick around? Business development companies, a form of direct lending funds, generated an average 12.5% annual yield since the first quarter, according to Fitch Ratings.
And what about reputational risk? A much larger customer base brings unwanted scrutiny. The importance of Blackstone's real estate product, which launched in 2017, resulted in equally high-profile media coverage on how it estimates the value of its assets. Is all that retail experimentation worth the trouble?
One concern with the growth of private credit is that this asset class may involve unknown risks in the financial system. We don't know how much these funds have borrowed to meet their returns, or what their loan agreements look like. Ironically, allowing mini-millionaires into this world may alleviate this concern, as some concerned citizens may be happy to share fund documents with the public and shed some light on this dark world.
More from Bloomberg Opinion:
- Private loans Had her 15 minutes of fame: Shuli Ren
- Matt Levine's Money Stuff: BANKS Do you want to get a private loan?
- Private equity is not your place The nest egg: Allison Schrager
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Shuli Ren and (email protected)