Private Credit Stress?

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.