Private Credit Attracts Institutional Investors as Retail Clients Depart

Institutional investors are reportedly pumping billions of dollars into private credit funds.

That’s according to a Monday (July 8) report from the Financial Times (FT), which noted that these major investors are hoping to profit from the departure of smaller retail clients.

North American direct lending funds aiming to attract institutional clients took in at least $16 billion in the second quarter, the report said, citing Preqin data. These funds, part of the larger private credit market, underwrite loans to companies without a bank serving as intermediary.

According to the FT, the three months leading to June 25 were the second-strongest quarter in four years for funding by these “closed-end” funds, which raise money from investors just once and have a limited shelf life

The report says the data suggests that big investors are still committed to this corner of the private credit world, even after a few large defaults and concerns about its overexposure to the software industry.

“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, David Colla, global head of credit investments at the Canadian pension plan CPP Investments, told the FT.

However, he added that “the returns are still respectable,” and said the retail exodus had opened a “gap in the private credit markets which institutional capital is filling.”

PYMNTS examined the evolution of the private credit space earlier this year, charting its a shift from a “contest of who can originate loans” to a “test of who can move them.”

The private credit market had, as of March, expanded to reach $2 trillion, with some forecasts placing it at more than $3.5 trillion in the years to come. This growth has been helped along by a collection of banks, asset managers and institutional investors providing behind-the-scenes financing, the report added.

“Yet that interconnection is now under closer review,” PYMNTS wrote. “Banks supply credit lines and funding facilities that allow private credit funds to operate, which means they share exposure to borrower performance even when they do not originate the loans. When liquidity tightens, that exposure can surface across multiple parts of the financial system.”

Loan sizes have grown as well, in many cases exceeding $80 million, per Federal Reserve data, while many borrowers are from sectors with limited tangible collateral.

“That combination raises questions about how risk is priced and how losses would be absorbed in a downturn,” the report added.