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LOS ANGELES: Rivals across the US$1.8 trillion private-credit industry are starting to agree on one thing: Stop calling funds “semi-liquid”.
That was one of the big takeaways as the titans of private markets descended on Beverly Hills for the annual Milken Institute confab, where they made it clear they were ready to move on from private credit’s recent woes.
“If I were to make one prediction for the industry – in particular for private credit – the word ‘semi-liquid’ will disappear”, EQT AB chief executive officer (CEO) Per Franzen said on Tuesday.
“These products are not liquid.”
This year’s conference arrived at a difficult moment for private credit.
Investors have been on edge for months following the abrupt collapses of Tricolor Holdings, First Brands Group and Market Financial Solutions Ltd, which sparked widespread fears about underwriting standards across credit markets.
Rapid markdowns of some holdings, concerns about how artificial intelligence will disrupt various industries and the war in Iran then spurred a slew of retail investors to flee private credit at an unprecedented pace.
“Retail is a wonderful channel, but you really need to treat it with kid gloves when you are trying to tap that market,” PJT Partners Inc CEO Paul Taubman said in a Bloomberg Television interview.
“There’s an increasing realisation it’s an institutional product, not a retail product.”
Founded by Michael Milken, who created the multi-billion-dollar junk bond market in the 1980s before being jailed for securities fraud in the early 1990s, his eponymous institute’s event has long been the venue where the giants of private capital come to debate the future of their industry.
With many private credit funds in damage-control mode following months of investor withdrawal requests, this year’s event was even more relevant.
“We need to make sure the story is clear: Private markets are illiquid,” Franklin Resources Inc CEO Jenny Johnson said during a panel at the event.
“That’s just it. You invest in private credit – it is illiquid.”
The comments come just weeks after the US Department of Labour made it easier for companies to offer alternative assets like private credit, private equity, crypto and real estate investments in retirement savings plans.
It was a move that many in the industry hoped would make it easier for firms like Blackstone Inc and Apollo Global Management Inc to gain traction in the US$14 trillion market.
Long the purview of ultra wealthy individuals, pension plans and insurance companies, proponents of the new rules say alternative assets will help retail investors notch much greater returns than traditional equities over an extended period.
But increasingly, many institutional investors “do not want to see retail money invested side by side with them,” said Ted Koenig, CEO of the Chicago-based private credit firm Monroe Capital.
“You can be the best underwriter in the world, but if you’re told you’ve got to do four times the volume in your portfolio than you have today, something’s going to give,” he said on a panel about private credit in the institutional portfolio.
“That’s what I’m concerned about,” the Monroe Capital chief executive added.
Raoul Hughes, who leads Bridgepoint Group Plc, said he didn’t think that the industry has found the right product yet to use for the retail channel.
Not all executives expect retail interest to fade. Frederick Pollock, chief investment officer of GCM Grosvenor, said that while retail investors need to better understand what they have bought into, they are absolutely here to stay.
“If you fast forward 10 or 20 years it would be shocking to me if this part of the market isn’t huge, if it doesn’t rival or exceed what you see from the institutional part of the market,” Pollock said.
Alan Schwartz, a Wall Street veteran who ran Bear Stearns Cos in its final days, warned that a market downturn won’t be as bad as the financial crisis, but that there’s likely more distress ahead.
“The recent demands for getting their capital back has put some focus on it,” Schwartz, who is now Guggenheim Partners’ executive chair, said on Tuesday in a Bloomberg Television interview.
“There are some tremors in that market.” — Bloomberg
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