Direct lending sets up on high street seeking retail and wealthy investors

Kellie Ell

Reporter

Private credit managers, historically reliant on institutional investors, are increasingly turning to retail investors for fundraising. The dramatic growth in private credit as a whole has been well documented. But in the past few years there’s been a massive pickup by retail and private wealth.

According to Alona Gornick, managing director, senior investment strategist and co-head of the Chicago office for Churchill Asset Management, “There is somewhat of a limited universe on the institutional side. Today, many of these institutions consider private credit as a core part of their portfolios, allocating to managers in an environment that has yet to see meaningful distress or dislocation. On the other hand, the surface has barely been scratched on the retail side in private credit. This is a massive untapped world.”

In the US, that product usually comes in the form of a business development company (BDC), either public or private, into which retail investors can tap. There are also more recent options like interval funds and the opportunity for high-net-worth individuals to invest in private credit through a wealth management firm.

So far, the trend is largely in the US, but Gornick says her firm, for example, typically creates offshore feeders, accounts that essentially aggregate investors into an offshore fund that then buys into a US fund. In Europe, European Long-Term Investment Funds and UK Long-Term Asset Funds are alternatives to BDCs.

“You need a distribution team covering the country”

Alona Gornick, Senior investment strategist | Churchill Asset Management

BDCs date back to 1980, but retail demand is growing. According to a report by the Alternative Credit Council and law firm Dechert, the fair value of BDCs in the past decade has more than tripled (from $82.2 billion in 2016 to $278.4 billion in March 2023), with the majority of that capital coming from US retail investors.

“There are no equivalent vehicles that have been able to raise capital at a similar scale,” the report says. “And marketing by private credit fund managers globally is largely focused on institutional clients.”

The momentum isn’t slowing. Of the 40 private credit managers surveyed for the study, nearly 60% said they currently have no retail clients. Of the respondents that don’t, 41% said they expect their firm will have retail clients in the future, while 22% are undecided, but are considering expanding to retail investors.

Mike Herzig, senior managing director and head of business development at First Eagle Alternative Credit, says that institutional trends often seep into retail, and with private BDCs offering yields between 10% and 12%, “it makes sense for wealthy individuals to take the same view”. BDCs are also a tax-effective way to invest.

Opening up private credit funds to retail investors also takes considerable scale, infrastructure and brand awareness.

“The retail channel is different to market to and fundraise for, as it requires a lot of resources, particularly to deliver education continuously,” Gornick says. “It’s so important to ensure these investors understand what they are receiving with these investments. You need a strong and coordinated distribution team covering the country to secure small investor commitments, versus institutionally, where you can do a series of focused meetings and get $100 million from one institution.”

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Global credit funds & CLO's

October 2023 | Issue 258

Published in London & New York.