London/New York | Large investors are committing billions of dollars to private credit funds as big institutions seek to profit from an exodus of smaller retail clients.
North American direct lending funds that seek to attract institutional clients raised at least $US16 billion ($23 billion) in the second quarter, according to Preqin data analysed by the FT. These funds, which are a subset of the wider private credit market, underwrite bespoke loans to companies without a bank acting as an intermediary.
The three months to June 25 were the second-strongest quarter for fundraising by such “closed-end” funds – which raise money from investors only once and have a finite life – in four years.
The data indicates that large investors remain committed to this part of the private credit market despite a handful of large defaults and worries about its overexposure to the software sector.
“Retail money has pulled back from private credit as they have digested the reality of lower return expectations” for loans made in 2021 and 2022, said David Colla, global head of credit investments at Canadian pension plan CPP Investments.
But he added that “the returns are still respectable”, and the retail withdrawal had “left a gap in the private credit markets which institutional capital is filling”.
Some of the largest private investment groups, including Blackstone, Ares Management and BlackRock’s HPS Investment Partners are meeting investors as they try to attract funds for new flagship vehicles.
Opportunity in volatility
Executives at Apollo Global brought forward the fundraising for their latest flagship direct-lending fund by six months to capture the demand, a source said, launching it to prospective investors last week.
Those funds have yet to close and so are not included in the Preqin figures for the second quarter.
Brad Marshall, who co-runs Blackstone’s flagship $US45 billion private credit fund, said that many investors expected returns to increase, particularly if outflows from retail-focused vehicles limited how much money those funds were willing to lend.
“Periods of volatility [are] usually the best time to invest capital because people are nervous, capital structures are a little more conservative and pricing is a little wider,” he added — a reference to the extra interest, or “spread” that lenders are able to charge above benchmark rates.
The demand from institutional investors contrasts with a spate of outflows from funds pitched to smaller retail investors and wealthy individuals. Private investment groups from Apollo to Morgan Stanley have limited withdrawals from those vehicles, which faced requests for more than $US22 billion of redemptions in the second quarter.
“The institutional side seems to be pretty clinical about how they’re approaching” direct lending, one private credit executive said. “Leverage is a little lower [on new deals], documents are a little tighter and price is wider. Those are the dynamics institutional investors see: that this market is getting better, not worse.”
Maine’s state public pension approved up to $US375 million in commitments to Blackstone’s latest direct lending fund in February, state disclosures showed.
New Jersey’s investment arm, which oversees one of the largest pension plans in the country, proposed committing as much as $US600 million to vehicles managed by private credit specialist Golub Capital.
Institutional investors’ optimism has been buoyed by the strength of the US economy, as well as the chance that interest rates could begin to rise if policymakers at the Federal Reserve attempt to tame inflation. Higher interest rates would bolster the returns on floating-rate private debt.
“They want more of it,” John Zito, co-president of Apollo Asset Management, said last month in reference to the institutional demand for private credit. “When they see the headlines, they are like, great, this is going to create a bunch of excess spread for us to put some money to work.”
Source: https://www.afr.com/world/north-america/big-investors-commit-billions-to-private-credit-despite-turmoil-20260706-p60d2l