12-05-2025
Breakingviews - Private credit's mass appeal creates new risks
LONDON, May 12 (Reuters Breakingviews) - Advocates for private credit like to tout a key advantage over banks: locked-up money. Depositors at old-school lenders can flee in a panic, as Silicon Valley Bank found in 2023, exposing a mismatch between flighty funding and hard-to-sell investments like business loans. By contrast, the backers of direct lending vehicles commit money for years, making a cascading run impossible.
A fast-growing part of the $2.2 trillion private credit universe, though, muddies the waters somewhat. Leading firms like Blackstone (BX.N), opens new tab, Apollo Global Management (APO.N), opens new tab and others have collectively raised nearly $300 billion from private individuals, according to PitchBook data, in large part thanks to the popularity of so-called evergreen vehicles, which offer investors the ability to redeem some cash. The structure is still much more robust than the traditional bank funding model, but the nascent private-credit retail boom introduces new risks.
Evergreen vehicles are hot, especially in the debt world. The Blackstone Private Credit Fund, known as BCRED, had $81 billion of assets under management on March 31, compared with $45 billion three years earlier. It shovelled nearly $1 billion of management fees to Steve Schwarzman's firm in 2024. Last year, private debt managers raised $67 billion through such vehicles, or roughly a third as much money as they raised from mainstay institutional backers like pension plans or charitable endowments, PitchBook reckons. Similar products are now sprouting up across Europe, including the $3 billion Ares European Strategic Income Fund.
The new breed differs from classic private credit in three ways. First, evergreens are perpetual, meaning that managers pour the proceeds from old investments into new opportunities rather than handing the money back to investors ahead of a set expiration date. Second, the vehicles' backers can pull cash at will rather than having it all locked up for years, though redemptions are typically limited to 5% of net asset value per quarter. This liquidity helps explain the third key difference: mass appeal. Investors in evergreen funds include the workaday rich, who generally like to know they could get a bit of money back if they need it. The typical customer would access BCRED and other products through wealth advisers at Morgan Stanley, UBS and elsewhere, though CEOs like Apollo's Marc Rowan are keen to expand the target audience to include retail investors with a 401(k) savings plan.
Evergreens have downsides. For one, managers lose control of when they invest. Perpetual funds, by definition, should ideally have all their money at work at any given moment, meaning they need to make loans as soon as cash comes in, while potentially sitting tight when investors redeem. As the Bank for International Settlements has argued, this may weaken, opens new tab one of private credit's innate advantages: the ability to deploy capital when others won't. That was particularly evident after the pandemic and 2022 rate-hike cycle, in which direct lenders seized, opens new tab market share from banks that were stuck with unsold buyout loans. The private-credit sector has delivered positive returns every year since 2010, with a 9.4% annual average over that period, according to Breakingviews calculations using MSCI Index data. To the extent that this performance comes from opportunistic timing, evergreen investors may lose out.
Another worry is that redemptions could ripple across private-credit markets during a crisis. Since funds own hard-to-trade assets like buyout debt, evergreen vehicles could struggle to get a good price if they had to sell fast to meet withdrawals. That may cause loan prices to fall more broadly. A sector that has prided itself on being a corporate-funding backstop could thus become the source of a problem. And since private-credit valuations aren't always transparent, investors may be more prone to yank their funds if they doubt those marks.
Industry advocates have strong arguments in response. With redemptions generally capped at 5% of net asset value per quarter, or 20% per year, fire-sales may not be necessary. Assuming a fund has spread its bets evenly among a pool of five-year loans, a fifth of the assets should pay back each year, meaning the vehicles could meet the maximum investor repayments without having to sell anything. Managers generally expect investments to turn over every three or four years, providing an even bigger buffer. They could also meet redemptions by drawing down bank loans or using cash and cash-like investments.
The industry's defence is backed up by a relatively robust performance. Evergreens were still nascent in the 2020 pandemic panic. But those that were around, like Blue Owl's Owl Rock Capital 2, coped with redemption requests. Nor did rate hikes and falling markets in 2022 trigger a meltdown: Fitch Ratings reckons the top funds saw redemptions peak at less than 3% of equity capital in the first quarter of 2023. There's also no evidence yet of mass withdrawals following the April 2025 market volatility.
Still, the industry's rapid growth risks bringing flightier investors into the fold. The danger is that persistently large redemption requests in a crisis, while not an immediate death sentence, mean that managers can't realistically make new loans, denting returns and effectively tipping a vehicle into slow-motion decline. Another risk is that firms struggle to deploy all the funds they're raising and so reach for riskier or harder-to-trade assets, like subordinated debt. That could lead to unexpected losses, spooking investors and making it harder to honour redemption requests. Already, private credit shops are racing to deploy over $400 billion of unspent capital, according to Preqin.
In other words, evergreen's rising popularity may be leading to a future with less sophisticated investors alongside riskier lending practices. It won't create anything as dramatic as a bank run, but managers will have to stay disciplined to avoid falling victim to their own success.
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