Credit managers less focused on commingled funds – report

An overwhelming majority of credit fund managers are offering customised investment options to their clients, according to research from the Alternative Credit Council and Dechert.

The research found 80 percent of firms offer LPs a mix of comingled funds and sidecar vehicles,  with 95 percent offering SMAs for single investors.

SMAs are typically only available to investors able to commit substantial sums, with half of firms stating they only offer SMAs at $100 million or above. However, a significant 22 percent of firms offer a lower entry point to separate accounts of less than $50 million.

Firms are also keen to explore more bespoke options which fit their investment strategies, according to respondents of the ACC and Dechert’s survey.

“Investors’ increasing sophistication and appetite for customisation has led to a proliferation of vehicle ‘entry points’ for our offerings,” said Nicole Adrien, chief product officer and global head of client relations at Oaktree Capital Management. “Beyond Luxembourg main funds – which used to be the primary entry point for most – we’ve seen a rise in requests for bespoke vehicles, whether they be ESG-focused, capital-efficient, currency-hedged or other.”

Firms also expect demand for co-investment and direct investment in private credit to increase with more than a third saying it will increase while just 7 percent expect a decrease.

Respondents said larger investors show an increasing wish to retain a greater level of control of deployment and setting terms instead of committing to a traditional comingled structure where the investment manager is in control.

Despite this drive for customisation, 46 percent of managers do not offer levered and unlevered sleeves in their credit funds while 41 percent currently do and 12 percent are considering it for future fundraises.

The research also found that retail investors are becoming more important for the private credit sector with 31 percent stating they have retail clients in the high-net-worth or semi-professional investor category while almost 10 percent have a wider range of retail investors. Firms also signalled an intention to raise more capital from retail clients in the future with 27 percent seeking more HNW clients and 15 percent looking at raising from a broader pool of retail investors.

Jane Griffin, head of product strategy at Pictet Alternative Advisors, said upcoming regulatory change could help bolster retail investment in Europe.

“The only way in which retail capital can be reached at scale in Europe is through the ELTIF, and the hope is that ELTIF 2.0 will change things drastically as the expected explosion of ELTIFs will make access to retail much easier,” she explained.

European regulators are hoping to emulate the success of BDCs in the US, which have provided mass-market access to private credit, through the ELTIF and the UK’s long-term asset fund structure. Fair value of US BDCs increased from $82.2 billion in 2016 up to $278.4 billion in March 2023.

“While the development of private credit as an asset class was built on institutional capital invested through traditional comingled closed-ended structures, we anticipate that a growing amount of capital will be invested both through alternative structures and from retail clients,” said Jiři Król, global head of the ACC.