Private credit funds and nontraded business development companies (BDCs) have endured a turbulent 12 months, with investors and advisors redeeming billions of dollars in shares. The S&P BDC Index fell 21.4% for the year ending Monday, a stark contrast to the S&P 500's 22.3% gain over the same period. This divergence has left many advisors questioning whether to hold or exit these once-popular yield vehicles.
Redemption mechanisms, which allow investors to sell shares back to the fund rather than on a secondary market, have been a key selling point for these products. Typically, funds permit quarterly redemptions of up to 5% of outstanding shares. However, the recent wave of redemption requests has strained these facilities, and some funds are now trading at significant discounts to their net asset value (NAV).
For instance, Blue Owl Capital Corp., a publicly traded BDC, reported a NAV of $14.41 per share at the end of March. By Tuesday, its shares were trading at $11.21, a 22.2% discount. The company is scheduled to release second-quarter earnings on Thursday, which could provide further clarity on its valuation trajectory.
Mark Goldberg, founder of Alternative Investments Markets Intelligence and a former senior executive in brokerage and alternatives, advises caution. “It would be ill-advised for many investors to sell at the moment, although those with an immediate need for liquidity are in a different boat,” he said. He noted that hedge funds are actively seeking to acquire these funds in the secondary market, a sign that some see value in the current discounts.
The pressure on private credit funds stems from several factors, including high-profile bankruptcies and fears that artificial intelligence advancements could disrupt software companies that rely on loans from these funds. These concerns have spooked investors, leading to a surge in redemption requests and a corresponding decline in fund valuations.
Hedge funds are circling the space. In March, Saba Capital and Cox Capital launched a tender offer to purchase 6.9% of shares in one of Blue Owl’s nontraded private credit funds at a steep discount. John Cox, CEO of Cox Capital Partners, which invests in non-traded alternatives via a proprietary fund, said, “Some of these funds will raise more capital or, more likely, continue to buy back clients’ shares, but I don’t think every fund has the same outcome.”
For advisors, the decision to hold or sell depends on individual client needs. Those with immediate liquidity requirements may have no choice but to redeem, even at a discount. Others may find that the high yields—often 9% or more—justify holding through the volatility, especially if the underlying loan portfolios remain stable.
The broader private markets landscape is evolving, with Cerulli Associates projecting a $2 trillion increase in advisor-held private capital by 2030. This growth suggests that despite current headwinds, private credit and related assets are likely to remain a significant part of advisor portfolios. However, the current discount environment underscores the importance of due diligence and careful liquidity planning.
As the market adjusts, some funds may seek to raise additional capital or adjust their redemption policies. Others may face continued pressure, leading to further consolidation or secondary-market activity. Advisors should monitor fund-specific developments and consider the long-term viability of each vehicle before making decisions.
