Large investors are increasingly directing capital toward private credit funds as retail investors retreat, according to recent fundraising data and industry sources. North American direct lending funds, which provide loans to companies without bank intermediaries, raised at least $16 billion in the second quarter, marking the second-strongest quarterly total in four years.
These funds constitute a segment of the broader private credit market and operate as “closed-end” vehicles, raising capital once and having a fixed lifespan. Despite concerns over certain high-profile defaults and potential sector concentration risks—particularly in software—large institutional investors remain committed to this asset class.
David Colla, global head of credit investments at CPP Investments, noted that while retail investors have pulled back amid lower-than-anticipated returns on loans originated in 2021 and 2022, institutional capital has stepped in to fill the void. “The returns are still respectable,” Colla said, highlighting a shift in investor base rather than a fundamental change in market dynamics.
Major private investment firms including Blackstone, Ares Management, and BlackRock’s HPS Investment Partners are actively engaging with institutional clients to raise funds for new lending vehicles. Apollo Global, according to a source familiar with the matter, accelerated the launch of a new direct lending fund by six months to capitalize on strong investor demand. Fundraising for these newer vehicles has yet to close and therefore is not captured in the reported figures for the second quarter.
Blackstone co-head Brad Marshall pointed to expectations of higher returns in the current environment, driven by the limited lending capacity of retail-oriented funds facing outflows. He described periods of market volatility as particularly attractive for investment, given more conservative capital structures and wider pricing spreads that lenders can command over benchmark rates.
The increased interest from institutional investors contrasts sharply with substantial outflows from retail-focused private funds. Industry participants report that redemption requests by retail and affluent individual investors exceeded $22 billion in the second quarter, prompting some firms, such as Apollo and Morgan Stanley, to restrict withdrawals.
A private credit executive remarked that institutional investors are approaching direct lending with a disciplined outlook, favoring lower leverage, tighter loan documentation, and wider pricing terms. These factors contribute to a perception that market conditions are improving despite recent challenges.
Underlying this positive sentiment is the relative resilience of the U.S. economy and the prospect of further interest rate hikes by the Federal Reserve aimed at controlling inflation, factors that could enhance returns on private credit investments in the near term.