The New "Barbarians At The Gate"

Retail investors are besieging private equity firms who have thrown up “gates” to block redemptions. 

Private Credit Funds (PCFs), once the exclusive province of large institutional investors, were sold by financial advisors (FAs) to “Mom and Pop” retail customers with the promise of higher income than their bonds were generating. Private equity firms such as Blue Owl, Blackstone and Apollo found a new source of funds for their risky deals.

FAs lobbied the Trump Administration to allow retail customers to invest in private credit in their 401K Retirement Savings accounts touting the “democratization” of PCFs. FAs and PCFs raked in high annual fees as well as “performance” fees from the retail customer base.

It turns out that the private credit space is cratering and retail customers cannot exit and recoup their investments.

There have been spectacular PCF failures such as First Brands and Tricolor.

PCF high interest loans to risky borrowers such as startup “Business Development Companies”  have default rates of 9.2 %, the highest level ever resulting in huge losses for investors.

JP Morgan’s Jamie Dimon mused that there are likely more “cockroaches” in the private equity space.

Retail customers who are known to bail at the first sign of trouble, unfortunately, are stuck as PCF exits are “gated” allowing only 5% of fund redemptions per quarter. Some PCFs have been deluged with redemption requests as high as 14 % and have suspended redemptions. Some have even had to raise funds internally to meet the unprecedented demand. 

Retail customers would be wise to consult an investment fraud lawyer to see if their losses can be recouped in FINRA arbitration cases against their financial advisors.