What are private credit funds?
What are the sources of private credit investment? Who are the key investors in private credit funds? What do trends in private credit mean for specialty lending? In this post, we'll dive into the latest findings from the Federal Reserve's recent report on the topic.
Private credit funds are corporate, non-bank lenders. They lend money to businesses that are not public companies. Typically, the companies that borrower from private credit funds are "middle-market" (i.e., medium-sized) companies, and the loans are floating-rate loans. Sometimes, however, the borrower companies are themselves specialty lenders.
Over the last decade, the amount of money managed by private credit funds has more than tripled, and currently stands at roughly $1.4 trillion. In every year since 2019, private credit funds have raised over $150 billion in new investment. And investors from Oaktree to Goldman Sachs see opportunity in the asset class.
But who are the key investors in private credit funds, and how stable is the funding they provide? Below, we'll cover what the SEC data on private credit reveals.
Who are the key investors in private credit funds?
Recently, the Federal Reserve released a Financial Stability Report in which it looked at the investors of private credit fund assets.
Because private credit funds are structured as "private funds," the breakdown below required the Federal Reserve Board staff to match SEC-registered investment advisers with names of private credit funds from Pitchbook and other data sources. While this approach isn't comprehensive, it does represent one of the most insightful views into private credit currently available.
So what did the Federal Reserve's researchers find?
Public and private pensions make up the largest categories of investors, accounting for 31% of private credit fund assets, followed by private funds with 14%, and (somewhat surprisingly) insurance investors and individuals, with 9% each. The other 36% of investment came from sovereign wealth funds, nonprofits, and other investors.
A quick note: there are restrictions on who can invest in private credit funds, so the two types of investors represented in the chart are institutional investors (e.g., pension funds, sovereign wealth funds) and accredited individual investors (individuals with a net worth of at least $1 million).
The Federal Reserve Board's report focused on the risk of a bank run, or similar occurrence, on private credit funds. It noted that, because private credit funds usually have a "closed-end" fund structure and lock up the capital of their investors, or limited partners (LPs), it would not be possible for the LPs in private credit funds to take all of their money at once.
What does this mean for fintech and other specialty finance lenders that use warehouse financing from private credit funds?
We've written in the past about how many specialty lenders rely on warehouse lines to fund their originations.
Let's unpack both sides of the equation.
Often, those specialty lenders are fintech or fintech-adjacent companies. There has been a "massive deceleration" in fintech funding globally, according to S&P Global, with VCs and startups reassessing the market opportunity in neobanking, payments, and revenue financing. The "front-end" of specialty lending—the origination of loans to consumers and businesses—may see less capital from VC investors moving forward, though it is too soon to say for sure.
On the other side of the equation are the warehouse lines. These asset-backed lines of credit often come from the private credit funds described in this article. In contrast to venture capital, private credit is seeing continued interest from institutional investors—especially as larger companies begin to consider borrowing from credit lenders. More money entering private credit means that private credit funds will need to compete to deploy that capital.
As VCs turn off the spigot for fintech platforms, and new institutional investors look for increased private credit opportunities, whether in asset-backed loans or otherwise, it seems that there are two opposing forces that will guide the availability of credit, at the consumer and SMB level: there will be fewer fintech lenders emerging in 2023 (and perhaps 2024), but the fintech lenders that exist may find it easier to raise debt capital (from private credit funds) to originate loans to their customers.
Want to learn more?
Finley is software that helps fintech, specialty finance, and other lending companies with asset-backed loans save time and money by automating routine debt capital management tasks like borrowing base reporting, verification, and alerting. Today, Finley manages over $2 billion in debt capital for customers like Ramp, Parafin, and Arc. If you're interested in learning more about software that can help you streamline your debt capital raise and management, just schedule a demo or take a self-guided product tour. We'd love to chat!