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I noticed in the financial section of my local paper another story about a private credit fund restricting withdrawals. This time it’s an outfit called Apollo Global Management. Apparently investors tried to redeem around 12% of the fund’s capital base within a short period of time, and the fund responded by doubling down on its 5% quarterly cap. The result? Investors can’t access their own money.
This is the third story along the same lines I’ve read about recently, the other two involving funds operated by BlackRock and Morgan Stanley. I don’t know a great deal about private credit funds and my closest approach was a $20,000 investment in a large crowdfunding platform called Funding Circle. That experience put me off the whole private credit market. They closed the secondary trading market during COVID and never reopened it. Five years later I’m still slowly retrieving my capital as the loans I partially funded come due.
What happened to me in 2020 is actually the textbook version of this problem. A secondary market existed to provide an escape valve, then it was closed under stress and never reopened. That’s not an aberration; that’s the actual liquidity profile of these products stripped of the marketing veneer. The big institutional funds are now experiencing the same thing, just at a scale involving billions rather than thousands.
My experience closed the door on private credit for me. I’ll come out of it with a profit, but a smaller one than I could have achieved by simply investing the money in an index tracker back in 2020. I didn’t need the funds at the time, but the liquidity issue has really rankled over the past five years.
So why am I highlighting the Apollo story and sharing my own crowdfunding misfortune? Because there seems to be a growing appetite among ordinary investors for private credit funds, and I’m not convinced it’s the right choice for most people. If you do go down that route, you need to think deeply about two things: the liquidity situation, and the potential for defaults among the underlying investments.
On liquidity, read the fine print on gates, caps and notice periods and ask yourself what happens when 10% of investors want out at once. On defaults, think about the quality of the underlying loans and who is doing the underwriting — because when borrowers struggle, that’s ultimately your loss, not the fund manager’s fee. Also watch out for payment-in-kind, or PIK, arrangements, which allow a borrower to pay interest by simply adding to the loan balance rather than in cash. It’s a way of disguising distress as ongoing performance.
Private credit may well deliver for those with deep pockets and longer timeframes. I think the marketing of these funds to ordinary investors promising superior returns doesn’t always make clear the price of admission: you are handing control of your money to someone else, and trusting that when you want it back, the fund will allow it. My $20,000 in Funding Circle taught me a lesson over five slow years. Before you commit a cent, ask yourself how you’d feel if you couldn’t access that money for just as long. Because if the gates come down, and as Apollo, BlackRock and Morgan Stanley have just demonstrated they can, that may be your reality.
Also, I think there is an issue with the opaqueness of the investments, so
limited insight into what you’re actually investing in.
Limited Partnerships were the financial scam of the day back in the the late 1970’s-early 1980s. I remember losing $18,000 of my first IRA savings way back then. Some investment lessons are truly learned the hard way.
Mark – Thanks for sharing your experience. I recently read a similar (or maybe the same) article about private credit. The Marketwatch website often features articles about people who invest in something (private credit, universal life insurance, annuities, options, non-fiduciary advisors, scams, etc.) but didn’t understand the fine print. I read those articles as cautionary tales – – – and hopefully as a warning to me for the future.
Private credit and similar interval funds can have a role for investors seeking assets uncorrelated with stocks and bonds. The weak correlation is partly a function of smoothed, infrequent pricing. The trade-off is limited liquidity and gated redemptions, which many retail investors find difficult to accept.
By contrast, public equities are marked to market continuously, so volatility is fully visible—and often amplified by sentiment, as we’ve seen recently with large-cap tech that dominates the S&P 500 today. The swings can be dramatic despite no change in the fundamentals of the underlying asset.
I’m not sure one is inherently better than the other. Each serves a different purpose, and both can belong in a portfolio if one understands the role the asset is meant to play.
The last part is doing a lot of heavy lifting — “if one understands the role the asset is meant to play” is the catch, and it’s a big one. Most don’t in my humble opinion.
Here in the US, similar investments are becoming available in 401Ks. I worry that young workers will suffer damages as a result.
Personally Dan, I think a young investor taking a haircut in private credit is preferable to someone closer to retirement who has far less time to recover. If anything, getting burned early might instil the right level of caution at exactly the age when it can still shape good habits.
Well, that was certainly true for me; I lost nearly $600 on that thing I purchased!
Still, I know some young-ins stashing all their money in Bitcoin. I hope they don’t accidentally throw their flash drive in the dump.
I worry about this too, Dan. Chris
Mark, thanks for an excellent post. I assume that the folks who invested in the private credit deals were told about the lack of liquidity and decided they had the risk capacity to take the plunge to earn a few extra basis points of interest. I also assume that some of them did not have the risk tolerance they thought they had. The financial services industry is great at rolling out the new, new thing and enticing investors with promises of riches that may or may not pan out. It is buyer beware out there or as my money and banking professor in business school once said. “Fellas, there are a million promoters in the world whose sole goal is to separate you from your money”.
Howard, your professor, was very wise to the ways of the world; I wonder if he had hard-won experience? Your point around risk tolerance is spot on—I feel people have a habit of overestimating this until the music stops.