Private credit managers are increasingly looking beyond traditional direct lending as fundraising slows, investor withdrawals remain elevated and new loan origination declines across parts of the market, according to a report by Bloomberg.
The shift is particularly evident among non-traded business development companies, where fundraising fell to about $2bn in the second quarter, an 82% decline from the $11bn raised during the same period a year earlier, according to Robert A Stanger & Co. The quarterly total was the lowest since 2020.
At the same time, investors sought to withdraw a record $23bn from private credit funds during the quarter. Many managers continued to restrict redemptions to 5%, leaving substantial amounts of capital effectively locked up. The latest figures on withdrawal requests are due as non-traded funds report their results at the end of August.
Stanger chief executive Kevin Gannon said the combination of weaker fundraising, persistent redemption demand and declining market flows was now having a visible impact on the size of the sector.
The pressure has not, however, developed into the systemic crisis some investors had feared. Recent results from listed business development companies have generally been more resilient, with managers focusing on portfolio clean-up and reducing exposure to weaker investments. The relative strength of those results has also helped support BDC share prices.
The market’s difficulties are prompting alternative asset managers to emphasise businesses outside conventional middle-market direct lending.
Apollo Global Management has repeatedly highlighted the breadth of its private credit platform, arguing that direct lending represents only a small part of the wider opportunity set.
Blue Owl Capital has similarly reduced its reliance on direct lending. The strategy accounted for around 35% of its assets under management in July, down from approximately half two years earlier, as the firm has expanded areas including lending to data centres.
Blackstone has also pointed to its growing exposure to AI-related investments as a contributor to recent performance, helping offset slower growth in management fees from its broader credit operations.
The diversification push comes as retail-oriented direct lending products face increasing pressure. These vehicles have become important sources of fee income for asset managers, but their ability to attract fresh capital has weakened as investors reassess private credit liquidity.
For BDCs, weaker fundraising means less capital available for new loans. Publicly traded BDCs have also been affected despite having access to permanent capital. According to PitchBook LCD data, the largest listed BDCs have reduced the size of their loan portfolios, with repayments exceeding new originations for a third consecutive quarter.
The outlook for non-traded funds will depend heavily on whether redemption requests begin to moderate.
BDCs face particular challenges because their leverage is closely tied to the value of their investment portfolios. Regulatory asset-coverage requirements generally require a BDC to maintain $1.50 of total investments for every $1 of debt.
While redemption activity is likely tp remain elevated for teh rest of the year, the ability to limit withdrawals to 5% of assets gives managers time to manage portfolios and wait for market conditions to improve. The restrictions also preserve a relatively stable fee base while reducing the risk of forced asset sales.
The changing fundraising environment is therefore pushing private credit firms to broaden their strategies rather than rely as heavily on direct lending. Recent activity across the sector includes new private credit secondaries vehicles, increased issuance of investment-grade bonds by private credit funds and fresh institutional mandates.
Jefferies Credit Partners is targeting about €1bn for a fund focused on the private credit secondary market, while Partners Group recently closed a $1bn private credit mandate with a major Asian institutional investor.
Blackstone Private Credit Fund and Blue Owl Technology Finance Corp. have also attracted demand for investment-grade bond offerings above their initial targets.
