BlackRock is embarking on a crucial test of its ability to muscle into one of Wall Street's most competitive growth areas — pitching private assets to small investors.
The world's largest money manager began rolling out the BlackRock Private Credit Fund this month, targeting mom-and-pop investors while vowing to keep "an eye on risk." The fund, dubbed BDEBT, primarily makes floating-rate loans to middle-market, private U.S. companies, an area that's expected to grow as banks rein in lending.
The fund arrives at a challenging moment.
Economists warn of a U.S. recession this year or next, and Moody's Investors Service said last week that private credit faces its first test as liquidity tightens. There are signs that private debt fundraising already slowed earlier in 2023 amid broader economic concerns.
Meanwhile, less risky investments are appealing to retail investors. With the Federal Reserve raising interest rates at the fastest pace in decades, U.S. Treasuries, money market funds and even some savings accounts yield about 5%.
"I don't think we need to take as much risk now to get good yield," 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, Keene said he now prefers "the regular bond world" with its "traditional fixed-income approach."
Crowded field
BlackRock — a giant of bond investing and low-cost index products — joins a crowded field as the fund prepares to start accepting investments from U.S. retail clients at the beginning of July.
Blackstone popularized the concept of a non-traded private-credit product for Main Street in 2020, with a fund that has grown to manage $48 billion of assets, including leverage, as of April 30. Blue Owl Capital, Ares Management and Fidelity Investments, among others, have created similar funds.
Across the asset management industry, firms are exploring alternative products that can yield higher fees and revenue after investors spent a decade shifting to cheaper benchmark and passively managed index funds. Investment advisors are expected to allocate about 7.1% of a moderate-risk client's portfolio to alternatives and commodities in 2024, up from about 6.2% last year, according to data from 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 markets assets. This month, the New York-based asset manager set a goal of doubling revenue from private markets assets to $2 billion over the next five years.
Private credit is a key part of this plan. BlackRock manages about $30 billion of such assets, a figure that could grow as some banks retreat from lending to mid-size companies. Private debt already ballooned to $1.5 trillion globally as of September 2022 from about $300 billion in 2010, according to Preqin. Public and private pension funds held about 31% of private credit assets as of 2021, according to a May report from the Fed.
In May, BlackRock set up a team dedicated to expanding private credit. The firm's private credit funds invest in direct loans to mid-size companies, especially software, insurance and health care firms, 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 $70,000 in net worth and $70,000 in annual income.
Laying the groundwork
While BlackRock submitted filings to the Securities and Exchange Commission in 2022 to start the fund, the company spent the past year working out details and obtaining state regulatory approvals for distributing it to clients. BlackRock structured the fund as a non-traded business development company regulated by the SEC, promoting it as less volatile than publicly traded investments.
The latest fund focuses on senior-secured, first-lien debt, which carries increased protections against default.
BlackRock will pitch the private-credit fund to registered investment advisors who may use custody and distribution services run by Fidelity, Charles Schwab and Bank of New York Mellon's Pershing. Company executives have started educational sessions and plan to travel around the U.S. to meet with advisors and wealth managers.
"We were 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 up to today was really laying the groundwork."
The BlackRock fund has about $150 million of net assets, with the firm committing startup funds of about $100 million. Other clients have invested from outside the U.S. including in Latin America. The fund is designed to charge a management fee of 1.25% with incentive fees. It has an income distribution rate of about 10.3%.
Despite risks facing the economy, Vig and Kathleen McGlynn, director of U.S. private capital, said they see investors beginning to look for extra returns on top of those from the market's safest assets. They predict private credit will be a larger part of investor portfolios going forward.
"This product isn't cash, but it's also not volatile bonds, volatile equities," Vig said, expressing confidence that BlackRock will gather assets for the fund.
"Fundraising, I think is a function of when not if," he added.
— With assistance from Suzanne Woolley, Davide Scigliuzzo and Paula Seligson.
