The growth of private credit has been one of the most significant shifts in global finance over the past decade. But as the asset class gains further traction in the mainstream, investment vehicles such as private credit exchange-traded funds, or ETFs, are emerging, promising access to the strong returns posted by established private credit firms to retail investors.
The problem, says Arif Bhalwani, CEO of Third Eye Capital Corporation in Toronto, is that investors accustomed to public markets and liquid returns may have distorted expectations of an inherently illiquid asset class.
“The rush to ‘democratize’ private credit through ETFs and retail-friendly structures is undermining the very characteristics that made the asset class attractive: patient capital, negotiated terms, and resilience through cycles,” Bhalwani wrote in a recent social media post.
Bhalwani was responding to a new study by the Bank of International Settlements, or BIC, titled Retail Investors in Private Credit. The BIC is the world’s oldest international financial institution and sees itself as a “bank for central banks”. The report concludes that “ETFs may introduce price signals that make the opaque private market more transparent, especially during downturns when discounts to net asset value (NAV) could be large and persistent. The rise of retail investment vehicles… could erode the benefits of private credit as an asset class.”
Private credit has traditionally thrived on its ability to operate outside the short-termism of public markets. Loans are illiquid by design, terms are individually negotiated, and capital is committed for multi-year periods. These features offer advantages such as stability, lower volatility, and less correlation with public assets, advantages which, by their very nature, are difficult to replicate in daily-traded shares.
Private credit ETFs are designed to trade like equities, while still holding loans that are inherently illiquid. This disconnect can become dangerous.
“Private credit ETFs create the illusion of liquidity, pairing daily-traded shares with illiquid underlying loans,” Third Eye Capital Corporation’s Bhalwani warns. “In periods of stress, this leads to steep NAV discounts, forced sales, and retail disappointment.”
The BIS report also addresses business development companies, or BDCs, which it calls “a type of closed-end private credit fund that is often publicly traded, and which already represents 20% of the private credit market in the United States.” BDCs typically avoid liquidity mismatches, but their debt-to-equity ratio, according to the report, has tripled over the past 15 years and is highly procylical.
Third Eye Capital Corporation is well aware of the mismatches caused by marrying shares traded in a liquid market with illiquid underlying private assets. Bhalwani points out parallels to previous market excesses. “Add in rising procyclical leverage, particularly among BDCs,” he notes, “and you get systemic vulnerabilities hiding behind the promise of yield.”
BIS foresees these instruments forcing fund managers to sell assets into falling markets to meet redemptions, thus magnifying price swings and potentially triggering systemic spillovers. Many BDCs have increased leverage ratios to maximize distributions, a strategy that works well in stable environments but can amplify risk during downturns.
These concerns about exposing private credit markets to the pressures of publicly traded assets come at a time when investor appetite for yield remains historically strong. In an era of low growth and high volatility, private credit’s proven track record of steady returns and downside protection naturally attracts attention from starved investors, including those who have always stuck with public mutual funds or ETFs.
But for Bhalwani and Third Eye Capital Corporation, broadening access shouldn’t come at the cost of structural integrity. “Private credit requires discipline, not democratization,” declares Bhawani.
He believes the answer lies in reinforcing the foundational strengths of the asset class—long-duration capital, individualized risk assessment, and the capacity to navigate through cycles without being forced into short-term moves.
Private credit’s resilience has turned it into a cornerstone of modern lending. Diluting that resilience for retail access may serve short-term demand, but it risks undermining the very value investors seek in the first place.