Private credit faultlines exposed by wealth channel inflows - Professional Wealth Management

Private credit, historically dominated by pension funds, insurers and sovereign wealth funds, has increasingly attracted family offices, private banks and high net worth individuals, many of whom have entered semi-liquid or "evergreen" vehicles in search of higher yields. As these investors have piled in, questions have emerged about liquidity, valuations and credit quality, according to Professional Wealth Management.

Patrice Mesnier, founding partner of Luxembourg-based Oldenburg Capital Partners, says the asset class is functioning as expected and that the problem lies in investor expectations. Because private credit assets are not continuously marked to market, stress surfaces through redemption queues, secondary market discounts or refinancing strain rather than immediate price collapses, which can create an impression of sudden fragility. He states that default rates remain manageable relative to historical stress periods, suggesting a repricing cycle rather than a collapse in fundamentals.

As markets became more volatile, managers of some semi-liquid funds, including BlackRock and Apollo, restricted withdrawals as redemption requests increased. Andreas Klein, head of private debt at Pictet Asset Management, argues the gating is by design, protecting remaining investors and avoiding fire sales of quality assets. He maintains that private credit has delivered stable, high-alpha returns, often outperforming syndicated leveraged loans and high-yield bonds on a yield and risk basis when historical loss rates are considered.

Both commentators point to distribution and disclosure as sources of friction. Klein says evergreen structures, which offer only limited and capped liquidity, were often distributed through financial advisers and RIAs in the US who may have been mis-incentivised and may not have fully explained the products to end clients. Mesnier argues some managers presented illiquid assets with liquidity features they could not fully support, primarily as yield enhancements. He adds that demand was initially institutional and rational during a zero-rate environment, but acceleration into wealth channels was reinforced by asset managers seeking permanent capital, distributors seeking differentiated products and wealth platforms seeking alternatives to compressed bond yields.

On regulation, Klein says a strong case exists for greater adoption of regulation and standardisation when serving less professional retail investors, citing the ELTIF 2.0 regime in Europe. Mesnier notes regulators underestimated how quickly private market products migrated into semi-liquid wealth structures, since the framework assumed institutional investors. He expects a gradual shift toward stricter liquidity management requirements, enhanced disclosure standards and closer scrutiny of valuation methodologies.