Key Takeaways
- • North American direct lending funds targeting institutional clients raised at least $16 billion in the second quarter, according to Preqin data cited by the Financial Times.
- • The three months to June 25 were the second-strongest quarter in four years for closed-end private credit fund fundraising, per the FT.
- • Retail investors are pulling back from private credit as lower-than-expected returns on 2021 and 2022 vintage loans are absorbed, according to David Colla of CPP Investments.
- • The private credit market had reached roughly $2 trillion as of March, with some forecasts placing it above $3.5 trillion in coming years.
- • Bank credit lines and funding facilities expose lenders to borrower performance, raising questions about risk pricing and loss absorption in a downturn.
Summary
Institutional investors are reportedly committing billions of dollars to private credit funds even as smaller retail clients step back, according to a July 8 report from the Financial Times. The FT reported that North American direct lending funds aiming to attract institutional clients took in at least $16 billion in the second quarter, citing Preqin data. Direct lending funds underwrite loans to companies without a bank acting as intermediary. The three months leading to June 25 were the second-strongest quarter in four years for fundraising by closed-end funds, which raise capital from investors once and have a limited life.
The FT report suggests large investors remain committed to the segment despite several high-profile defaults and concerns about overexposure to the software industry. David Colla, global head of credit investments at CPP Investments, told the FT that retail money has pulled back as investors digested lower return expectations on loans made in 2021 and 2022. He added that returns remain "respectable" and described the retail exodus as opening a "gap in the private credit markets which institutional capital is filling."
PYMNTS placed the private credit market at $2 trillion as of March, with some forecasts projecting more than $3.5 trillion in the years ahead. Growth has been supported by banks, asset managers and institutional investors providing behind-the-scenes financing. PYMNTS noted that banks supply credit lines and funding facilities that allow private credit funds to operate, meaning they share exposure to borrower performance even when they do not originate the loans, and that this exposure can spread through the financial system when liquidity tightens.
Loan sizes have also grown, in many cases exceeding $80 million according to Federal Reserve data, while many borrowers operate in sectors with limited tangible collateral. PYMNTS said this combination raises questions about how risk is priced and how losses would be absorbed in a downturn.
The FT report suggests large investors remain committed to the segment despite several high-profile defaults and concerns about overexposure to the software industry. David Colla, global head of credit investments at CPP Investments, told the FT that retail money has pulled back as investors digested lower return expectations on loans made in 2021 and 2022. He added that returns remain "respectable" and described the retail exodus as opening a "gap in the private credit markets which institutional capital is filling."
PYMNTS placed the private credit market at $2 trillion as of March, with some forecasts projecting more than $3.5 trillion in the years ahead. Growth has been supported by banks, asset managers and institutional investors providing behind-the-scenes financing. PYMNTS noted that banks supply credit lines and funding facilities that allow private credit funds to operate, meaning they share exposure to borrower performance even when they do not originate the loans, and that this exposure can spread through the financial system when liquidity tightens.
Loan sizes have also grown, in many cases exceeding $80 million according to Federal Reserve data, while many borrowers operate in sectors with limited tangible collateral. PYMNTS said this combination raises questions about how risk is priced and how losses would be absorbed in a downturn.
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