AllianceBernstein is currently developing private credit strategies for the wealth market in the UK and mainland Europe, as the asset manager looks to tap into retail investors’ under-allocation to private credit.

The Tennessee-headquartered firm has $70bn (£51.6bn) in assets under management (AUM) across four main strategies: corporate direct lending; commercial real estate direct lending; investment-grade, corporate and structured credit private placements; and AB CarVal, which it acquired three years ago adding capabilities in asset-based finance, energy transition and opportunistic credit.

Matthew Bass (pictured), head of private alternatives at AllianceBernstein, said that retail and wealth channels are a key focus for the firm.

“We’ve been developing products for individual investors for many years and are now expanding that beyond our own wealth business to third parties,” he told Alternative Credit Investor.

“This channel is a key focus with our investment teams, creating products for these clients.

“Retail is still very under-allocated to private credit, broadly defined. So there will be significant capital in motion over time.

“Our goal is to grow private alternatives AUM to $90-100bn by the end of 2027. So we’re on that path. It’s an organic strategy, and the retail and institutional channels will be key in achieving that.”

AllianceBernstein currently has a public non-traded business development company that is open to UK retail investors but there are plans to launch other products for individuals in the region.

“We are currently in development of other strategies that will be available for the wealth market in the UK and mainland Europe,” Bass said.

AllianceBernstein launched an interval fund in the US with the AB CarVal team last year, called the AB CarVal Credit Opportunity Fund.

Bass indicated that the firm may replicate this vehicle in other parts of the world.

“When we do something in the US, we like to create the right structure for Europe and Asia,” he said. “We’ve got a large retail footprint in Asia as a firm.”

Private credit fund managers have been making a huge push into the wealth market in recent years, to diversify sources of funding and scale up their businesses.

However, some industry onlookers, including regulators, have raised concerns about the expansion into the retail channel due to fears that individual investors are not suitably educated about the risks and lack of liquidity involved with the asset class.

Bass concedes there is “a question of suitability and asset allocation” but he believes that private assets should be a part of all investors’ portfolios.

“To what extent is an individual investor going to be comfortable locking up liquidity?” he said.

“After that, it’s a question of the vehicle. I think the evolution of the vehicle has been meaningful over the past five years.

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“If it’s public non-traded business development companies that you could buy into on a daily basis, there’s, of course, a governor on liquidity going out. You’ve got closed-end funds in the US that are point and click. There are no subscription documents, so there’s greater ease. You also have a variety of technology platforms that have been created to streamline investor access. I think you’re going to see more and more of that.

“But I think private assets should be a part of, depending upon suitability, all investors’ portfolios. It’s key to being able to save for the future, including college and retirement. You should be able to benefit from that return premium. That shouldn’t be limited to ultra-high-net-worth investors, in my opinion.”

Private credit ETFs

While Bass is a supporter of retail investors’ inclusion in the private credit sphere, he is sceptical about the recent launches of exchange-traded funds (ETFs) with a private credit proponent.

“Ease of access is terrific, but I question [ETFs’] applicability for private credit, and what it does to the liquidity premium,” Bass said.

“As an investor I’m sceptical about why you’re investing in private credit for that illiquidity premium, and how much of that premium are you, in essence, paying away to get it in ETF form? Is it ultimately worth it?

“These are conversations we have with our clients, and we’re led by our clients. Often we like to engage with them and lead them, but it’s a two-way street. If there’s client demand, we’ll have to be responsive to that.”

No bubble

Bass eschewed speculation that private credit is in a bubble, instead highlighting that there has been a share shift between public and private credit.

He noted private credit’s strong correlation to the private equity market due to the dominance of sponsor-backed direct lending, meaning that private equity would need to be showing signs of stress before private credit would be impacted.

“If there is a bubble in private credit, that would imply that there is more of a bubble in private equity, because in order for private credit to incur a loss, the equity needs to be wiped out,” he said.

“Let’s step back and look at the trend in private equity buyout multiples over time. They’ve been pretty consistent historically. Equity contributions by sponsors have gone up over time. As multiples have gone up, it’s been made up more by increased equity contribution than increased leverage. Furthermore, with a private equity sponsor, you have a very sophisticated hands-on manager of the business as a first line of defence, which is a benefit of private credit that you don’t have in public credit necessarily.”

Bass said that equity cushions, leverage and cash flow coverage in the firm’s private credit portfolio are “healthy”.

Read more: AllianceBernstein: Asset-based finance ‘a burgeoning market yet to be tapped’

“I think it’s easy to look at the growth of a market in isolation and say, there’s a bubble there because I’m trying to look at what happened in the financial crisis and extrapolate that to the next thing,” he added.

“But buyout multiples are relatively consistent, equity cushions are going up in support of the debt. I’m not seeing signs of a bubble. I’m seeing signs of a share shift in how credit is provisioned.

“And from a risk protection perspective, you’re in a much better position as a private lender to protect downside.”

However, Bass conceded that challenging market conditions are likely to result in higher defaults across certain industries, which may impact some managers disproportionately based on their process, origination funnel and deals.

“The receding tide may reveal some more differentiation,” he added.

“Part of our business is getting ahead of that, proactively managing that and driving recovery. That’s normal cyclical behaviour.”