By Claire Sawyer, Associate Director of Educational Programs, CAIA Association
It is a truth universally acknowledged that a market in possession of too much capital must be in want of a deal. In an Austen-esque transformation, private credit has emerged from the drawing room and into polite society; awkward, underdressed for the occasion, and accompanied by an eager but sometimes ill-prepared chaperone known as semi-liquid fund structures.
The rise of private credit over the last decade has been impressive, rivaling even the character development of one Fitzwilliam Darcy (yes, I regret to inform those of you blissfully living in ignorance up to this moment, his first name is indeed Fitzwilliam). The strategy found its footing in the wake of new regulations and hastily retreating banks following the financial crisis. Direct lenders provided capital when few others would, and in return, they received generous yields, favorable covenants, and the respect of sponsors and LPs alike.
But alas, the shine may be fading. Over burnt hotel coffee and watered-down cocktails, there are murmurs that too much capital is chasing too few deals, and that the vehicles built to accommodate rising retail demand are straining under the weight of practical constraints.
We recently sat down with Hilary Wiek, Senior Strategist at Pitchbook to discuss the current and future prospects of this private markets debutante. You can watch the full conversation here.
Much Ado, but Little Lending
Today’s private lenders are not so different from the hopeful suitors of Austen’s universe: flush with capital but increasingly uncertain whether the objects of their affection (borrowers) will accept their terms. Like Mr. Bingley over-analyzing his every breath in Jane’s presence, they worry that one misstep will leave them cast aside for a more charming alternative.
Borrowers, meanwhile, are playing hard to get—or perhaps just declining the proposals that are, shall we say, less than compelling. It’s hardly surprising that “You have bewitched me, body and soul” won Elizabeth over where “Many years since I have had such an exemplary vegetable” did not (though one must give Mr. Collins credit for extoling the virtues of boiled potatoes in such an iconic fashion).
In this environment, borrowers can afford to be picky, and some managers are willing to accept terms that would have been deemed unseemly not so long ago (looking at you, Charlotte Lucas). The deals that do get done often feature fewer covenants and thinner spreads, as lenders chase opportunity like Mrs. Bennet trying to offload one of her daughters on any acceptable suitor.
And as a consequence of this prevailing “will they, won’t they” dynamic, portfolio companies find themselves endlessly preparing for an exit that never seems to arrive, requiring lenders to sometimes “pretend and extend.” Put this all together, and new (appealing) deals are about as rare as a wedded Bennet sister. To paraphrase a weary Mr. Bennet, “What are we to live on if the good deals are all gone?”
Retail Invites Itself to the Ball
Enter: retail capital, stage left.
With the demise of defined benefit plans and the rise of individual retirement accounts, high-net-worth investors and their advisors have arrived on scene, requesting access to private credit’s once-exclusive party. But unlike the traditional LPs who understand the customs of this asset class, the new arrivals require accommodations, chief among them liquidity. Think: younger Bennet sisters running amok at the Meryton ball, much to the obvious disapproval of high society guests.
To the glee of some and chagrin of others, the industry has obliged, introducing a variety of semi-liquid and evergreen offerings. They are, in theory, the ideal match: wealth gains access, GPs raise fresh capital, and everyone is pleased. Smaller minimums? Check. More liquidity? Theoretically. Portfolio diversification? Sort of… because beneath the polished surface of these structures lies something rather less romantic.
What’s in a Name? (Or a Term Sheet?)
Some of the funds marketed as “private credit” might be more accurately described as “credit flavored.” True, they may hold a smattering of direct loans, but they may also be diluted to the point of immateriality. This is not accidental, nor is it entirely the fault of fund managers. Liquidity must come from somewhere, and private credit is famously slow-moving. So, to meet redemptions, GPs introduce assets that are more liquid but less aligned with the core strategy. The result? Something like Mr. Collins attempting a waltz: allowed but not exactly desirable.
And then there are the fees. Some of these funds have exasperatingly complex structures: multiple share classes, layered expenses, and incentive fees based on internal valuations (often audited by someone with a charitable definition of “fair value”). So, to recap, these funds:
May or may not have a meaningful exposure to private credit
May or may not offer the liquidity they claim to (on a reliable basis, at least)
May or may not have a fee structure that negates any upside from the first item on this list
An exemplary vegetable, indeed.
Questions, Like Courtships, Deserve Due Diligence
Before flinging capital into one of these funds with all the reckless enthusiasm of Lydia Bennet in pursuit of husband, allocators should take a moment to ask some decidedly unromantic questions:
Is this actually private credit? Or is it largely clever marketing? The fund may be described as one thing, but a quick look under the bonnet might reveal something else entirely.
What are the fees, and how are they justified? Beware the manager who speaks eloquently but charges like Mr. Wickham in all his beguilingly underhanded glory.
How is liquidity managed? Promises of quarterly redemptions are delightful until market stress arrives. Then one discovers whether the GP has that Darcy mettle or they’re more inclined to disappear when scandal (or redemption pressure) strikes.
What happens in times of distress? Has the GP managed through a downturn? Will they engage under less-than-ideal conditions or simply hand the keys back with a sigh and a reference to “unforeseeable macro headwinds?”
How are deals prioritized across vehicles? When the same manager runs both drawdown and evergreen funds, the conflict of interest becomes more than just an intellectual exercise. Everyone fancies themselves the beloved Jane of the family—don’t learn too late that you’re actually Mary.
A Matter of Discernment
For investment professionals, the challenge is twofold. For the eager, it’s to ensure that one’s appetite doesn’t overshadow a prudent investment process. For the skeptics, it’s to balance caution with curiosity. The answer is neither to throw oneself headlong into these new products nor to reject them out of hand. Rather, it’s to engage with them rigorously: ask impolite questions, read the fine print, and distinguish between what is truly new and what has merely been repackaged. Because while we may live in an era of product innovation, outcomes still depend on substance, not on charm.
So, to all the GPs introducing private credit funds, and to the LPs now taking their turn about the drawing room: tread carefully. Capital may be abundant, but good judgment remains, as ever, in tragically short supply.
About the Contributor
Claire Sawyer is Associate Director of Educational Programs at CAIA Association. She began her tenure at CAIA as Relationship Manager for the UniFi by CAIA™ learning platform, later transitioning to serve as the platform's Program Manager. Most recently, she served as Associate Director of Content Development, focused on supporting and implementing CAIA's global content strategy. She holds a BA in Legal Studies from UC Berkeley, the Sustainability and Climate Risk (SCR) certificate from GARP, and is a Level 2 CAIA Candidate.
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