Private credit funds adapt to demand for liquidity

Research reveals increasing demand for liquidity among private credit fund managers

Private credit funds adapt to demand for liquidity

A recent report conducted by the Alternative Investment Management Association (AIMA) found a shift in the private credit landscape as fund managers respond to rising demand for liquidity, with many exploring hybrid or evergreen fund structures. 

Evergreen and hybrid funds offer investors greater flexibility, allowing for new subscriptions during the fund's life while imposing certain restrictions on redemptions. These structures also enable investors to remain invested in the strategy for an extended period. 

According to the report, these options are gaining popularity among investors due to their ability to support “efficient capital raising and deployment, while also providing investors with more control over their capital allocations to private-credit strategies.” 

One driving force behind the adoption of more flexible structures is the growing interest in retail investors. The survey found that 40% of respondents intend to raise capital from retail clients in future fund offerings, primarily targeting high-net-worth individuals. 

In Canada, several traditional asset management firms, including Purpose Investments, BMO Global Asset Management, and CI Global Asset Management, introduced evergreen private market funds this year. 

The report highlights the challenges of marketing private credit funds to investors, including explaining return profiles, liquidity constraints, and fees. Private credit investment strategies typically involve higher operational costs, including credit underwriting, due diligence, and reporting, leading to additional fees, often in the form of performance fees alongside management fees. 

While the retail market presents “a different type of complexity” in terms of operations and regulation compared to the institutional market, the report suggests that managers who successfully navigate these challenges when raising retail capital “will enjoy a considerable first-mover advantage in markets outside of the US.” 

The research is based on a survey conducted by the Alternative Credit Council (ACC) and Dechert LLP, involving 40 private credit managers overseeing approximately $800 billion across various jurisdictions.