The recent flurry of withdrawals from private credit vehicles is prompting some institutional investors to rethink investing in funds alongside individuals, as they turn instead to evergreen structures with more limited redemption terms, according to industry sources.

As withdrawals from non-traded business development companies (BDCs) have dominated the news over the first half of the year, the focus has been on retail investors pulling back from the asset class while institutions continue to invest.

However, those within the industry have suggested that the events have prompted some these investors to reconsider the risks of committing alongside individuals.

“Some [institutional] investors don’t want to be associated with the wealth management segment,” an industry source told Alternative Credit Investor. “They believe these investors are reacting way too quickly to some headlines without actually having done fundamental due diligence, which overall has implications for the fund, which they do not like.”

They did add however that “some others, do not really care” and continue to allocate to so-called semi-liquid funds.

Having institutional investors in a fund alongside wealth clients can serve as a “rubber stamp” for the latter, who take it as a vote of confidence that large pensions or insurance companies are invested in the vehicle.

But, Umang Rajbhandari, director, private markets at Bfinance, explained that recent BDC redemptions have accelerated an existing trend of institutional investors seeking a different type of evergreen vehicle, with less emphasis on regular liquidity.

“They want an institutional grade, evergreen structure, so they don’t necessarily need those quarterly redemptions,” he told ACI. “What they prefer is a vehicle that has mostly institutions in it, that has them running off, rather than having full redemptions.”

“It would be hard pressed not to say that headlines around BDCs are probably pushing them towards a different type of open-ended vehicle.”

Rajbhandari stated that while part of the reason for institutional investors seeking out these structures is the recent pressure funds have been put under by their large private wealth investor base, they are also looking to minimise “cash drag” by investing in such vehicles.

Read more: BDCs turn defensive amid redemption pressure

Hybrid evergreens

A recent trend that has emerged within the asset class is a new type of evergreen vehicle, offering investors a middle ground between traditional closed-ended funds and semi-liquid structures.

Fabian Körzendörfer, partner in the private debt research team at Stepstone, highlighted this new structure, which typically calls capital over a defined investment period before giving investors the option to remain invested or move their exposure into run-off.

This comes as Bridgepoint has recently set up an evergreen direct lending fund in Luxembourg, an extension of the manager’s European strategy. Despite the vehicle being evergreen, it is not semi-liquid and not targeting individual investors, ACI understands. The fund gives investors a perpetual investment horizon but remains illiquid, as it will not offer any redemptions.

Another trend gaining traction among institutional investors is separately managed accounts (SMAs).

James Turner, head of credit at the UK’s largest defined contribution pension fund Nest, told ACI that the master trust only makes its private credit allocations through SMAs.

The reason for this is that it is not subject to the “whims of other investors”, including runs on funds, when a large number of investors try to withdraw their money from a vehicle at the same time, as well as the need to maintain a liquidity buffer.

Read more: Redemptions rise across credit funds in Q2 as software risks build