By Andrew Bary
Private-credit managers are trying to disprove a negative -- and it has created the biggest upheaval for the $1 trillion market since it came on the scene after the financial crisis.
Fears that private-credit funds have big batches of bad loans have rocked the business. The funds make junk-grade loans with yields of close to 10% to private companies.
While the number of defaults has been low, investors have been lining up to exit semiliquid private funds like Blackstone Private Credit, known as BCRED, and BlackRock's HPS Corporate Lending fund. Publicly traded business development companies, or BDCs, which hold similar loans, are down an average of 10% this year and recently traded at an average discount of 25% from their year-end portfolio values, according to Raymond James.
To listen to private-credit managers, worries are misplaced. Credit quality is good, they say, despite a few nonperforming loans here or there. Unfortunately, there's no way to prove that's the case -- or that the good won't go bad. Private-credit portfolios are illiquid and opaque, with little financial information on individual borrowers, which are usually small to midsize companies taken private in leveraged buyouts. Judging from big discounts on BDCs, markets are signaling that portfolio values as of year-end 2025 are too high by 10% or more.
It's a problem of the industry's own making. Private credit was initially an investment mainly for institutions. The industry, however, made a big bet on retail investors. There now are about $180 billion of assets in BDCs and another $350 billion of private semiliquid funds, which have limits on how much can be withdrawn in a quarter.
Now investors are heading for the exits. Withdrawal requests from private funds accelerated in the current quarter, leading some like HPS Corporate Lending to limit withdrawals to stated 5% quarterly caps. Redemption requests are likely to stay high for at least several quarters. Inflows to private funds could dry up in coming months as wealth managers balk at committing client cash to them, given negative headlines about private credit and the ability to buy similar cheaper public funds. It's hard to justify staying invested in private funds when public funds with similar assets -- and often from the same manager -- trade for a 25% discount. Blue Owl Capital, Blackstone, Ares Management, and Apollo Global Management run both public and private funds.
Wealth managers may also fear that clients will be stuck in the funds if redemptions are restricted or gated. Professionals know that it generally pays to be first out of a fund in redemption, as the best and most liquid assets often get sold first.
"The private-credit asset class doesn't have a lot of liquidity, and if you use hybrid vehicles that have quarterly redemption features, you create liquidity in an asset class that doesn't have liquidity, and so you've got an inherent problem," Ted Neild, CEO and chief investment officer at Gresham Partners, told Barron's Advisor. "The provision was created with good intentions. But the structure itself creates its own problem: People realize they have to get out first, otherwise they're going to be trapped."
Private-credit managers should take action to try to turn things around and rebuild investor confidence. First, they should cut fees. Private-credit funds charge steep fees that can run at five percentage points annually or more on net assets at BDCs such as Blue Owl Capital, Ares Capital, and FS KKR Capital, Barron's calculates. Private-credit managers have defended the fees, saying that it takes more time and effort to underwrite hundreds of private loans than to evaluate public securities, and that investors should focus on returns, not fees. That argument is harder to make as investors suffer.
The Blackstone Private Credit fund offers a lower-cost model with an annual fee of about 2.5%. Even better are closed-end junk-bond and leveraged-loan funds like BlackRock Corporate High Yield or Nuveen Floating Rate Income, which usually charge fees of close to 1% annually and own more-liquid and easier-to-value assets.
"A lower fee structure would go a long way toward improving managers' standing with investors," says Julian Klymochko, CEO of Accelerate, a Canadian financial-services company.
The funds should also consider reducing leverage. Investors may not be aware that private-credit funds -- public and private -- generally employ about a dollar of debt for every dollar of equity. They do so in part because they can't offer dividend yields approaching 10% without leverage, given the high fees. Managers say they use less leverage than banks, but private-credit portfolios are more leveraged than closed-end junk-bond and leveraged-loan funds that buy more-liquid securities. Taking leverage down would cut risk. And borrowing costs are heading higher.
Given liquidity risks and cheaper public funds, investors should avoid private funds. These include Blackstone Private Credit, Blue Owl Credit Income, and HPS Corporate Lending. Their portfolio values have little upside and considerable downside -- if credit conditions worsen and public markets are accurate in signaling lower loan values.
"Stay out of the nontraded BDCs," says Klymochko. He argues that investors putting new money into private funds effectively provides liquidity to sellers.
Instead, investors should consider public funds, which can be bought for 75 cents on the dollar, rather than paying full value for private funds. The average discount on public funds recently stood at 25% relative to year-end portfolio values. The most extreme example is the FS KKR BDC, which trades at a 50% discount to net asset value due to credit concerns.
For those comfortable with the risks, consider the likes of Blue Owl Capital, MidCap Financial Investment (managed by Apollo Global Management), Blackstone Secured Lending, and Morgan Stanley Direct Lending, public BDCs trading at discounts to portfolio values. They yield an average of about 12%, reflecting their discounted stock prices. Another alternative is the Van Eck BDC Income exchange-traded fund, whose largest holdings include the biggest BDCs. It's now trading around $13 is yielding more than 12%.
There's another potential source of upside. BDCs trading at discounts of 10% or more -- and especially those at 25%-plus discounts -- ought to be repurchasing stock. They have the wherewithal since they get loan repayments every year, often 15% or more of their asset base. Many BDCs have buyback authorizations, but relatively little stock has been repurchased industrywide. "How in good conscience can managers underwrite new loans at 8% or 9% when their stocks yield 13%?" asks Klymochko.
Buybacks would send a strong positive signal to investors and boost fund net asset values. Repurchases would retire shares and reduce fee income, but managers need to put investors first.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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March 20, 2026 13:28 ET (17:28 GMT)
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