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.
