The higher risk, higher reward world of private credit is targeting the wealthy.
Blackstone Group Inc., Carlyle Group Inc., Apollo Global Management Inc. and other large firms have started offering products for individuals to invest in loans to midsized companies that banks won’t touch. The lure is a potential annual return at times surpassing 8%, when corporate bond return indexes are negative, plus a relatively low initial investment.
Their push coincides with a broader democratization in financial markets, with apps such as Robinhood Markets Inc. helping people find their way into everything from SPACs to Dogecoin. The meme-stock phenomenon in the U.S. this year showed the potential return for retail investors in distressed companies such as AMC Entertainment Holdings Inc., up more than 1,500%.
“My concern is if a client is looking for yield, there is a reason you’re getting a much higher yield than a Treasury, and that’s an increase in risk,” said Paul Auslander, director of financial planning at ProVise Management Group.
For banks, it’s not just that the loans are risky, but that capital requirements put in place by regulators make it hard to hold certain investments.
There’s reason to believe the new products will attract retail demand: Yields on fixed-income investments are near historic lows as central banks suppress rates to support the post-pandemic economy. And private equity firms — whose client lists typically include pension funds, endowments, insurance companies and sovereign wealth funds — are now gaining traction with affluent individuals.
Blackstone, for example, opened up hedge fund products, private real estate investment trusts and longer-term drawdown funds to individual investors — asset classes historically limited to institutions.
Now the firm is offering its Blackstone Private Credit Fund (BCRED), investing mainly in direct loans to U.S. middle-market companies, including senior secured and unitranche loans, as well as subordinated debt. Unitranche loans include elements of conventional loans and unsecured debt. According to its website, BCRED Class I shares, for higher earners, delivered a 7.34% return this year through June 30.
Some classes of the Blackstone fund may reach even the merely affluent. Eligible investors in the fund must have a net worth of at least $250,000 or a gross annual income of at least $70,000 and a net worth of at least $70,000, according to its website. The minimum initial investment in the Blackstone fund’s common shares is $2,500, per its prospectus.
“We see the investment opportunity and we believe the investor demand is there,” said Joan Solotar, global head of private wealth solutions at Blackstone. The environment today “makes it challenging for a traditional fixed income portfolio to deliver the necessary yield.”
“If you look at the future of asset management, it is closely intertwined with private wealth,” said Stephanie Drescher, chief client and product development officer at Apollo. “This is a strategic decision to lean in and amplify our commitment and create significant momentum and access for those buyers.”
Individual investors account for almost 20% of the assets Blackstone manages as of the second quarter. The firm expects that figure to eventually reach 50%. KKR & Co. co-president Scott Nuttall said in April that about 10% to 20% of capital raised over the past several quarters came from individual investors.
Faced with criticism that the products could prove too risky for rookie traders, private equity managers are quick to point out their products cater to higher net worth, more sophisticated investors — not the day trader crowd.