Private-credit executives point to an overreliance on a small group of wirehouse brokers and wealth management gatekeepers as a primary driver behind surging withdrawal requests from nontraded business-development companies over the past year or so.
These wealth advisers, including some within banks, funneled capital from individual investors into BDCs over the past few years, a trend that fueled the spate of elevated shareholder redemptions, according to several attendees of this year's Greenwich Economic Forum.
Over the past few years, direct lenders like Blue Owl Capital and KKR channeled wealthy investors into their BDCs, touting their double-digit yields, according to industry executives speaking on the conference sidelines earlier this week.
But much of that money arrived through a pipeline of banks, brokers and wealth advisers such as Morgan Stanley, UBS and Bank of America's Merrill unit. None of the advisers, brokers or banks responded to requests for comment.
Some of the credit firms that have been affected more significantly than others by the withdrawals received billions of dollars through these channels, said Ken Kencel, the president and chief executive of Churchill Asset Management.
"When those firms turn, it can be a massive turn," he added, speaking on one of the forum panels.
Across the roughly $2 trillion private-credit industry, a widening divide has emerged over the past year between funds fulfilling quarterly redemptions smoothly and those forced to ration client cash behind customary 5% withdrawal limits.
While signs of stress in private credit persist, the market hasn't collapsed. Payment-in-kind income reported by BDCs has remained elevated at about 8% in recent quarters, according to a September report from credit evaluator Fitch Ratings.
Redemptions also remained elevated, although all 19 of the vehicles tracked by Fitch capped redemptions at 5% of net asset value in this year's second quarter, and net capital flows remained negative compared with the preceding quarter, Fitch said.
Publicly traded BDCs and funds have fallen from their peak last year and trade around 82% of their NAVs following this year's uncertainty. Ares Capital Corp. shares have declined 7.1% this year, while FS KKR Capital has plunged 27% and Blue Owl Capital Corp. has dropped 18%.
Public scrutiny has largely focused on credit trouble related to some private equity-backed software companies whose businesses may be threatened by artificial intelligence advances. But several Greenwich forum participants said from the sidelines that the real fault lies in the plumbing that sent much of the money to the BDCs in the first place.
The executives said much of it is the byproduct of risks created by the reliance on a few wirehouses and wealth advisers for capital.
When just one of these conduits decides to trim its target allocation to private debt, the decision ripples across potentially thousands of advisers and client accounts. That can translate into exit orders amounting to billions of dollars hitting a single BDC overnight.
This change in distribution priorities can trigger even more redemption requests and create a run-like dynamic even without any deterioration in the quality of an evergreen fund's or BDC's underlying credit holdings.
Ways to avoid this concentration risk include anchoring funds with institutional capital and improving investor understanding of terms such as semi-liquid, executives at the forum said. An institutional anchor investor or two can prevent a single broker or bank from flooding quarterly liquidity windows and triggering runs, they said.
And they stressed finding ways to ensure that investors who enter these pools through retail channels understand what they are getting. Credit funds need to make sure that wealthy investors know that their cash won't be returned under some circumstances, Kencel said, following his panel appearance.
"I think the lesson has been learned," he said. "When you think about the marketing of some of these private-credit funds, they were called semi-liquid."