(Bloomberg Businessweek) -- All it took for Jess Dato Paliogiannis to become an investor in the esoteric world of private credit was a few taps on her mobile phone. The 30-year-old New Yorker, an operations consultant to startups, used the Titan app to put $2,000 into a fund managed by the global investing giant Carlyle Group Inc. “It was exciting to invest in something that traditionally was not available to retail investors,” says Dato Paliogiannis, who recently sold the position, scoring a 37% gain over two years, after fees. Now she’s on the lookout for easier ways to access private credit on other platforms.
Dato Paliogiannis is just the kind of person the industry is trying to woo. Private lenders have spent the past dozen years minting billionaires by usurping traditional Wall Street banks and packaging their risky corporate loans into products that have become staples of insurers and pension funds. But with interest from large institutions tapering off, they’re going after Main Street. “We are probably in the second or the third inning in the expansion of these private credit products in the broader, mass-affluent market,” says Shane Clifford, head of global wealth at Carlyle. “There’s still significant upside to go from here.”
So far, retail investors are jumping in mainly through interval funds, which get their name from only allowing people to take their money out after set periods, making them semi-liquid. Interval funds have ballooned to oversee $85 billion of assets, up from about $25 billion four years ago; a record 43 new funds were registered in 2024. The Carlyle Tactical Private Credit Fund, an interval fund Clifford oversees, has more than doubled in size over the past two years, to $5 billion, including leverage. As a benchmark, retail investors have swooped in on complex products called leveraged exchange-traded funds, propelling them to $140 billion.
The direct lenders’ ambitions are much bigger, however: They want to offer a way for anyone with a Charles Schwab or Robinhood account to get involved in private credit through exchange-traded funds. Two ETFs with exposure to private credit began trading in December, and Apollo Global Management Inc. and State Street Global Advisors Ltd. are hoping for a green light from the US Securities and Exchange Commission in 2025 for their own ETF that would invest in private credit.
The prospect of an ensuing wave of retail investment has consumer advocates and even Jamie Dimon, the JPMorgan Chase & Co. chief executive officer, warning that private credit is too risky for retail investors. These calls echo regulators’ wider concerns about the lack of transparency around private loan valuations that they say could jeopardize broader financial stability.
The problem, financial watchdogs say, is that the debt underlying the private credit products isn’t widely traded, and the funds get to decide what their loans are worth, which could mask signs of distress that public markets would expose. Also, the borrowers behind the loans aren’t held to the same reporting requirements as listed companies. It’s simply impossible for a retail investor to objectively value a private credit product, says Ben Schiffrin, director for securities policy at Better Markets, a consumer-focused economic security nonprofit. “There’s a reason that the private markets and private credit are usually limited to institutional investors, and that’s because they tend to be way riskier.”
With interval funds, the period an investor needs to wait to pull money out could stretch for months. And the money could end up trapped if a fund’s loans go bad and the net asset value suddenly plummets, causing the fund manager to close it for redemptions. “The risk is that the people don’t know what they’re buying,” says Brian Moriarty, associate director for fixed-income strategies at Morningstar Inc., “whether that’s too much leverage or too much illiquidity.”
Direct lenders argue that they have the expertise to ensure the products they sell are sound. Clifford, the Carlyle executive, says his firm has years of experience managing these sorts of complicated financial instruments. And of the risk to broader financial stability, Apollo CEO Marc Rowan has argued that banks carry more debt than private credit firms, so removing loans from the banking system lowers its overall leverage.
The private credit craze dates back to the aftermath of the global financial crisis of 2008, when banks pulled back from risky loans, and lenders outside the regulated financial system stepped in. Since 2015 the market has roughly tripled in size, to $1.6 trillion, growing to encompass traditional direct lending to smaller companies, buyout financing and real estate and infrastructure debt.
Direct lenders are hoping the retail investor strategy can increase growth, because investments from asset managers and pension funds have flatlined. Market research firm Cerulli Associates estimates that retail’s contribution to the asset class will climb to 23%, from 13% now, in the next three years. “The number of people that are proactively looking for private credit has grown astronomically,” says Walker Williams, chief market strategist for private wealth at Lido Advisors. His firm has doubled the average allocation to the asset class in just four years.
BlackRock Inc. is making a huge push to sell private assets, and Capital Group and KKR & Co. plan to start two funds together for wealthy individuals in the first half of 2025 that will invest across public and private debt markets. BlackRock introduced a private credit fund for accredited retail investors a year and a half ago that’s raised $800 million including leverage, and Phil Tseng, a managing director at the company, says the fund is drawing interest from people who traditionally put their money into stocks and public debt: “Investors are looking to capture returns on the private credit side instead.”
Mobile apps make it easier to invest, but the fees for private credit can turn people off. For interval funds, they average around 2.5%, among the highest charged to individual investors for any product, compared with 0.6% for the average ETF, according to Morningstar. A private credit ETF that allows investors to take out their money on any trading day would open the asset class to even more people. State Street and Apollo have offered glimpses into how they could make that possible in their filing to the SEC: Apollo would provide daily liquidity by offering to buy back the investments, though that could come with limits.
The idea of an ETF is intriguing to Sam Slaughter, 62, who’s put $250,000, a little less than a 10th of his nest egg, into private credit funds. He started investing three years ago, when his adviser told him about the asset class and recommended the Blackstone Private Credit Fund, or BCRED. “After fees, the rates of return have been very good,” he says. He’s not worried about the risks: “I particularly feel comfortable because Blackstone is a good outlet. If they started to feel that things were not going well, they would get us out.” —With Vildana HajricRead next: 50 Company Stocks to Watch in 2025
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