Oaktree: Wealth market push has hiked private credit risks
The democratisation of private credit has “materially increased” the risk factors around the asset class, according to Oaktree.
The alternative asset manager’s co-chief executive and head of performing credit Armen Panossian highlighted growth in private credit-focused business development companies (BDCs) in the US, which have become accessible to high-net-worth investors.
He argued that this has resulted in less disciplined lending that has reduced the quality of pricing and increased leverage in new deals.
“[High-net-worth individuals] are now accessing private credit through private BDCs that take in subscriptions monthly, and therefore the investment manager must deploy that capital pretty quickly because if they don’t, then their dividend can erode, it could get diluted,” said Panossian during a podcast.
Read more: Goldman Sachs launches private credit fund for wealth market
“And so that month-to-month technical change in appetite of these business development corporations can, and I would say, has changed the quality of the private credit market.
“Because when it was purely an institutional product, it was a drawdown product. And therefore investment managers could be patient. If they didn’t like the quality of the instruments, the pricing on the instruments, they could give it a quarter or two or three before they resume deployment. But in the case of BDCs, especially with those investment managers that have a considerable portion of their assets under management in direct lending from these BDCs that take monthly flows, they cannot be as disciplined.”
Panossian went on to say that this has changed the quality of the market, “in terms of pricing, in terms of leverage being too high in new deals”.
“And we think that the risk factors around private credit for those that are not disciplined is materially increased as a result of the democratization of this asset class,” he said.
Private markets giants such as Blackstone, BlackRock, Ares Management and Carlyle have been accelerating their push into the wealth channel in recent years, to diversify their investor base and meet their growth targets.
Earlier this year, Apollo Global Management managing director Veronique Fournier said that the firm is “well on track” to raise $50bn from the wealth market for its private capital products by 2026.
