Investors double down on private credit as retail exits

The split highlights a growing debate over the outlook for private credit.

Institutional investors committed $16 billion to North American direct lending funds during the second quarter, even as retail investors sought to withdraw more than $22 billion from evergreen private credit vehicles, underscoring a growing divide in how different investors are approaching the asset class.

Fundraising for closed-end direct lending funds reached its second-highest quarterly level in four years, according to a Financial Times report citing Preqin data.

The inflows came despite concerns over rising defaults and the private credit market's exposure to sectors such as software.

The fundraising has been driven by some of the industry's largest alternative asset managers, including Blackstone, Apollo Global Management and BlackRock's HPS Investment Partners. Apollo also accelerated fundraising for its latest vehicle to capitalize on institutional demand.

At first glance, institutional inflows appear to be offsetting retail withdrawals. However, the figures point to a more nuanced picture.

While new commitments flowed into long-term drawdown funds, retail investors requested more than $22 billion in redemptions from evergreen funds during the same period, prompting Apollo and Morgan Stanley, among others, to restrict withdrawals under their liquidity provisions.

The divergence reflects the different structures through which investors access private credit. Closed-end drawdown funds are designed for illiquid investments, allowing managers to call capital over several years without facing redemption pressure.

Evergreen funds, by contrast, offer periodic liquidity, making them more vulnerable when investor sentiment weakens.

The current market environment may also benefit newly raised funds.

As retail outflows ease deal competition, lenders are securing wider credit spreads, tighter documentation and lower leverage on new loans. Those conditions could enhance returns for funds deploying fresh capital today.

However, for existing portfolios, wider lending spreads generally reduce the value of previously originated loans, creating mark-to-market pressure.

For evergreen funds that regularly report net asset values, those markdowns could weigh on reported performance even before any increase in realized credit losses.

That dynamic helps explain why institutional investors and retail investors may be reaching different conclusions from the same market conditions.

Long-term investors such as pension funds and endowments are able to look through short-term valuation movements and focus on the improved lending environment, while investors seeking liquidity may be more sensitive to near-term declines in reported returns.

Recent commitments reflect that confidence. Maine's public pension system approved a commitment of up to $375 million to Blackstone's latest direct lending fund earlier this year, while New Jersey's state investment arm has proposed investing up to $600 million with Golub Capital.

For investors, the contrasting capital flows suggest private credit is entering a new phase.

Rather than signaling weakening demand for the asset class, retail withdrawals may be creating more attractive deployment opportunities for institutional investors with patient capital.

Whether that divergence persists will depend on credit performance, interest rates and whether confidence returns to the evergreen fund market.

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