It’s been a tough year for such funds. For the year ending Monday, the S&P BDC Index was down 21.4%.
Funds that invest in private company loans, dubbed private credit funds or nontraded business development companies, have taken a broad hit in the past year as investors and financial advisors have pulled billions of dollars in cash from such vehicles through a process called share redemption.
That means investors have been selling billions of dollars’ worth of their shares, not to other investors, but back to the fund companies. Now, what should advisors and clients do with these funds?
Many have seen valuations decline even though the funds continue to kick off yields of 9% and up, depending on the vehicle.
For example, Blue Owl Capital Corp., a traded BDC, posted a net asset value at the end of March of $14.41 and was trading Tuesday at $11.21 per share, a discount of 22.2% of NAV.
The fund releases its second quarter earnings on Thursday.
“It would be ill-advised for many investors to sell at the moment, although those with an immediate need for liquidity are in a different boat,” said Mark Goldberg, a former senior executive in the brokerage and alternative investment industries who is the founder of the website Alternative Investments Markets Intelligence.
“There’s a reason why hedge funds are trying to buy these funds in the secondary market,” he added.
It’s been a tough year for such funds. For the year ending Monday, the S&P BDC Index was down 21.4%. Meanwhile, the S&P 500 is up 22.3% for the past year.
Many illiquid private loan funds have touted their redemption process as part of financial advisors’ sales pitch of the product, which has seen sales explode in the past several years.
Private credit funds and nontraded BDCs, which also typically pay advisors healthy commissions, usually allow clients to redeem or sell back up to 5% of the fund’s outstanding shares per quarter.
That means investors and their advisors aren’t locked into illiquid funds in perpetuity, as has been the case with some moribund alternative investments in the past.
Such funds have taken a hit in the past 12 months as investors have been spooked by high-profile bankruptcies and fears that advances in artificial intelligence functions will wipe out private companies that make and distribute software, a sector reliant on loans from such funds.
Hedge funds are circling the space. Saba Capital, alongside Cox Capital, launched a tender offer in March to purchase 6.9% of shares in one of Blue Owl’s nontraded private credit funds at a steep discount.
“Some of these funds will raise more capital or, more likely, continue to buy back clients’ shares, but I don’t think every fund has the same outcome,” said John Cox, CEO of Cox Capital Partners, which invests in non-traded alternatives in the secondary market via a proprietary fund.