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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The author is vice-chair at Oliver Wyman and former global head of banks and diversified financials research at Morgan Stanley
Once the domain of pension funds, insurers and the uber-wealthy, private credit is undergoing a quiet transformation.
Product innovation and technological advances are rapidly opening the door to a new class of investor: individuals who are affluent but not in the top-tier of the ultra-rich. One blended fund that invests in public and private assets now has a minimum investment of just $1,000.
The result is one of the fastest-growing segments in investing. Private credit holdings by the wealthy have grown 2.5 fold in the past three years — four times faster than the traditional institutional business. On new estimates by Oliver Wyman, these investors now account for roughly 12 per cent of the private credit assets of leading firms. Much of this is still concentrated in the hands of the ultra-rich, but the ambition is clear: to bring private credit into the mainstream of wealth portfolios. Oliver Wyman estimates the top seven firms have around $275bn of private credit assets under management from the wealthy and the total industry to have $325bn-$375bn.
Evergreen funds, which allow new investors to buy and redeem stakes periodically rather than invest for a fixed period, are transforming access. One key reason is the ability to put funds to work right out of the gate, unlike so-called drawdown funds which make complex cash demands on investors, calling in committed funds over time to deploy.
Investors are also rethinking what makes a diversified credit portfolio, asking why they should put 100 per cent of fixed income investment into public assets. Many wealthy investors are starting to adopt a “barbell” strategy — combining low-cost bond ETFs at one end with higher-yielding, less liquid private credit at the other. This barbell effect, long a hallmark of equity investing, is now reshaping bond investing and has a very long way to run.
Technology, meanwhile, is enabling a simpler process. Private assets have historically been a heavy lift in their document demands and sold in large lots. But this is being streamlined into something closer to the experience of buying a mutual fund, albeit with a few more signatures.
How far could this go? Advisers and managers that Oliver Wyman has surveyed suggest private credit allocations by wealthy individuals could double or quadruple in the next five years as they become a component in a broader credit portfolio. Still, success will hinge on asset managers solving four key challenges.
First, liquidity management. Private credit, by definition, is illiquid. Firms will need to navigate the likely cyclical nature of retail capital flows and maintain underwriting discipline amid rapid growth. Those with diverse origination channels and strong risk controls will be better placed to do this.
Second, cost-effective distribution. Reaching hundreds of thousands of financial advisers across the US and internationally is no small task. Private credit firms typically lack the sales infrastructure to address retail channels at scale, while traditional asset managers often lack deep expertise in private markets. This creates a compelling rationale for partnerships — such as Apollo’s tie-up with Lord Abbett, KKR’s with Capital Group, and Blackstone’s alliances with Wellington and Vanguard. Expect more of these to emerge — as well as some further acquisitions to add capabilities.
Third, infrastructure. For private credit to become a true retail product, it will need secondary market liquidity, evolved pricing conventions and better data and analytics. The ecosystem remains nascent, but development is accelerating.
Last, regulation. Regulators will have to keep an eye on the sector and ensure customers are being treated fairly. As allocations grow, expect them to issue guidance.
All of this is happening before any regulatory changes in the US allow more investments by 401(k) pensions plans in private assets. Broadly, private credit is likely to become a component in diversified credit portfolios — including managed investment accounts. In some ways, this is akin to the mainstreaming of derivatives in credit mutual funds in the 1990s and 2000s to add to returns and manage risks.
This shift underscores just how much the market structure of finance is changing. The lines will be increasingly blurred between private and public credit. As more capital flows outside public markets, the foundations of how risk is priced, accessed and distributed are quietly being rewritten.
