Pimco Executive: Wealth management firms are retreating from private credit, with over $14.5 billion potentially trapped for several quarters.

Earlier this year, several large direct lending funds suddenly restricted investor redemptions, prompting wealth management institutions to cope with the resulting impact and start withdrawing from the private credit market while intensifying their search for alternative investment products. Christian Stracke, the president of PIMCO, stated in an interview on Tuesday, "The demand for direct lending-type private credit alternatives is significantly increasing, especially since wealth management distribution firms are no longer willing or able to sell direct lending-type private credit products to retail investors." In the first quarter of this year, as concerns grew over the exposure of certain private credit funds to software companies threatened by artificial intelligence (AI), some of the world's largest private credit management firms were forced to halt investor withdrawals from semi-liquid private credit funds known as Business Development Companies (BDCs). According to media estimates and data published by Robert A. Stanger & Co. in July, over $14.5 billion of investor capital is currently trapped in more than a dozen funds. Stracke noted that many investors are still waiting for their funds to be returned and may have to wait for some time to receive them. He stated, "Most BDCs currently have redemption requests queued up equivalent to about 15% of their assets under management, which will take several quarters to fully process." PIMCO, with $2.26 trillion in assets under management, is one of the largest credit investors globally. Several executives from the firm have recently expressed concerns about the fundamental health of the $1.8 trillion private credit industry. In recent months, underwriting standards and asset quality in the industry have been under close scrutiny from regulators. Some wealth management institutions are currently changing their terminology used to describe investments in private credit and private equity funds, substituting "semi-liquid" for terms like "conditional liquidity" or "periodic liquidity," to better prepare investors for potential future redemption crises. In such scenarios, investors' funds may be locked due to redemption restrictions. Stracke also pointed out that several BDCs are sitting on a backlog of troubled loans, particularly in the software sector set to mature in 2027 and 2028. The software industry will face significant refinancing challenges in the coming years. According to estimates from S&P Global Market Intelligence, a total of $386 billion in syndicated loans will mature in 2028 and 2029, respectively. Stracke said, "The industry will have to deal with these troubled loans for the next few years." He anticipates that default rates will remain high during the same period, "which will lead investors to continue taking a wait-and-see approach in this space for quite some time." Stracke also stated that publicly traded non-investment-grade bank loans often offer higher yields than those provided by some private credit managers, and PIMCO is collaborating with more banks and non-bank institutions to acquire such assets for its clients. He pointed out, "If you are a retail investor or any type of investor, it is completely rational to exit from illiquid assets and seek higher returns in more liquid assets." Meanwhile, PIMCO remains actively invested in publicly traded debt issued by some of the largest private credit institutions, including Blue Owl Capital Inc.