Private credit is probably not the place for democratization
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Illustration: Sarah Grillo/Axios
An experiment in democratizing private markets looks to be on the way out: Retail investors don't seem to have the stomach for it.
The big picture: What happened with Blue Owl, a private credit firm that had retail investors clamoring for their money back, sparking a mini crisis that was a PR mess for the company, sent its stock price down sharply, and rattled investors about the entire sector.
The latest: Blackstone is allowing investors to redeem a record 7.9% of shares from its flagship credit fund, Bloomberg reports, as requests from investors for their money gain steam.
Zoom in: Blue Owl is exhibit A for a particular segment of private credit: business development companies, or BDCs, a structure created by Congress decades ago to funnel investments to smaller businesses.
- They're often publicly traded and attract ordinary, or retail, investors.
By the numbers: Around 40% of Blue Owl's $307 billion of assets under management are from individuals, according to the Wall Street Journal, which is more than typical in this space.
- The company's stock is down nearly 30% this year.
Flashback: Last fall, JPMorgan Chase CEO Jamie Dimon warned about private credit after a lender collapsed.
- "When you see one cockroach, there's probably more," he said. That led to a raft of pieces worrying about another financial crisis.
Reality check: Anytime something big is falling apart in lending, people draw parallels to 2008.
- But what happened back then was seismic. The crisis involved most of the housing market, where nearly 70% of Americans owned a home. For most, their house was their biggest asset, the main source of their wealth.
Zoom out: Private credit, for all its new inclusion of retail investors, is just not that big. That doesn't mean it's calamity proof, but context matters.
Zoom in: Private creditors have more flexibility to restructure loans.
- They don't just lend money. They also take equity stakes and hold loans themselves, says David Robinson, a finance professor at Duke's Fuqua School of Business, who has done some research here.
- "The resolution of financial distress is easier to facilitate," he tells Axios.
Follow the money: Also, crucially, these funds are usually gated. You can't just get all your money back.
- That's good for these credit companies because they're not at risk of a classic bank-run style event — go watch "It's A Wonderful Life" again — when everyone races to get their money back and the whole thing falls apart.
Between the lines: Some private credit firms offer "semi-liquidity," set times where investors can get some cash out. It's a good way to attract that sweet sweet retail money.
- But Blue Owl's kerfuffle showed a pretty clear downside to the strategy.
State of play: "The non-sophisticated investor is learning a very valuable lesson," says Joseph Brusuelas, the chief economist at RSM US.
- Pouring capital into hard-to-understand markets should be the province of a select number of investment or capital markets professionals, he says.
- But there's another learning opportunity here, he notes, for policy folks who now weighing whether or not to include these kinds of investments into regular people's 401(k)s.
- There should probably be a pause on those considerations, he says.
The caveat: Wall Street is hardly giving up on drawing more retail investors into private credit.
- Blackstone plans to offer a new publicly traded fund that would let individuals invest in the data center boom, Bloomberg reported.
The bottom line: Democracy in private credit might have been overrated.
