March 4, 2024

BlackRock is embarking on a key test of its ability to tap into one of Wall Street’s most competitive growth areas — marketing private assets to small investors.

The world’s largest fund manager this month began launching a BlackRock private credit fund aimed at retail investors, while vowing to “closely monitor risks”. The fund, known as BDEBT, provides floating-rate loans primarily to middle-market U.S. private companies, an area expected to grow as banks rein in lending.

The fund comes at a challenging time.

Economists are warning the U.S. will slip into recession this year or next, and Moody’s Investors Service said last week that private credit is facing its first test as liquidity tightens. There are signs that private debt financing has slowed in early 2023 amid broader economic concerns.

At the same time, lower-risk investments are attractive to retail investors. With the Federal Reserve raising rates at the fastest pace in decades, Treasurys, money market funds and even some savings accounts are yielding around 5%.

“I don’t think we need to take too much risk right now to get good returns,” Luke Keene, chief investment officer at Hudson, Wisconsin-based Leverty Financial Group, said in a phone interview.

While private credit funds helped investors avoid bond losses last year, Keane said he now prefers the “conventional bond world” and its “traditional fixed-income approach.”

crowded venue
Bond investing and low-cost index giant BlackRock has joined the crowded field as the fund prepares to start accepting investments from U.S. retail clients in early July.

Blackstone popularized the concept of non-traded private credit products to Main Street in 2020, and the fund had grown to $48 billion in assets under management (including leverage) as of April 30. Blue Owl Capital, Ares Management and Fidelity Investments, among others, have established similar funds.

After investors spent a decade turning to cheaper benchmarks and passively managed index funds, firms across the asset management industry are exploring alternative products that can generate higher fees and income. Investment advisers are expected to allocate about 7.1% of moderate-risk client portfolios to alternative investments and commodities by 2024, up from about 6.2% last year, according to Cerulli Associates.

BlackRock’s private credit fund fits into the firm’s long-term plan to become a one-stop shop for low-cost index funds, actively managed funds and private market assets. This month, the New York-based asset manager set a goal of doubling private market asset revenue to $2 billion over the next five years.

Private credit is a key part of the program. BlackRock manages about $30 billion in such assets, a figure that is likely to grow as some banks move away from lending to midsize companies. Global private debt has ballooned from about $300 billion in 2010 to $1.5 trillion by September 2022, Preqin said. Public and private pension funds hold about 31% of private credit assets through 2021, according to the Fed’s May report.

In May, BlackRock created a team dedicated to expanding private credit. The firm’s private credit fund invests in direct lending to mid-sized businesses, particularly software, insurance and healthcare companies, with enterprise values ​​between $100 million and $2.5 billion.

Investors in the newest retail fund can have a net worth as low as $250,000, or a net worth of $70,000 with an annual income of $70,000.

lay the foundation
While BlackRock filed documents with the SEC to launch the fund in 2022, the firm has spent the past year working out the details and getting approval from state regulators to distribute it to clients. BlackRock structured the fund as a non-traded business development company regulated by the SEC, touting its lower volatility than publicly traded investments.

The newest fund focuses on senior secured, first-lien debt, which offers more protection against default.

BlackRock will market the private credit fund to registered investment advisers who may use custody and distribution services operated by Fidelity, Charles Schwab and BNY Mellon’s Pershing Bank. Company executives have begun holding educational sessions and planning trips across the U.S. to meet with advisors and wealth managers.

“We’re not focused on being first to market,” said Rajneesh Vig, managing director and co-head of U.S. private capital at BlackRock. “A lot of the time today is laying the groundwork.”

The BlackRock fund has about $150 million in net assets, and the firm has committed about $100 million in initial capital. Other clients invest from outside the United States, including Latin America. The fund is designed to charge a management and incentive fee of 1.25%. The income distribution rate is about 10.3%.

Despite the risks to the economy, Vig and U.S. Private Capital director Katherine McGreen said they are seeing investors seeking extra returns beyond the market’s safest assets. They predict that private credit will form a larger proportion of investors’ portfolios in the future.

“It’s not cash, but it’s not volatile bonds, volatile stocks,” Vig said, expressing confidence that BlackRock will raise assets for the fund.

“I think fundraising is a function of when rather than if,” he added.

— With assistance from Suzanne Woolley, Davide Scigliuzzo and Paula Seligson.