In a recent fireside chat, Eric Muller, Portfolio Manager and Partner, CEO of BDCs at Oak Hill Advisors, shared his expertise on the democratization of private assets in private credit.

Key takeaways from the discussion:

Industry Trends:

• The private credit asset class has grown significantly since the Great Financial Crisis, driven by superior returns compared to other below-investment-grade credit markets.
• Large players are getting larger, but there is still room for differentiation and innovation.
• The industry is shifting towards alternative investment channels, such as business development companies (BDCs) and non-traded BDCs, which offer easier access to retail investors.

Retail Investors:

• Retail investors are becoming increasingly important, with the potential to equal or surpass institutional capital in the next 10 years.
• Education and product innovation are crucial to cater to this new investor base.
• Regulatory scrutiny is expected to increase, with a focus on disclosure, communication, and investor protection.

Manager’s Perspective:

• Scale is a significant advantage in private credit, enabling firms to invest in robust systems, technology, and sales forces.
• Brand recognition and reputation are essential in building trust with investors and wealth advisors.
• The ability to deploy capital effectively and manage liquidity is critical in private credit, with risks associated with negative bias and forced investments.

Investor Concerns:

• Investors are concerned about the influx of capital into the asset class, potentially leading to decreased returns.
• The impact of declining interest rates on the asset class is a key concern, although Muller believes that private credit can still offer attractive returns.

Product Innovation:

• The industry is seeing a proliferation of products, with a focus on innovation and differentiation.
• The question remains as to how many similar products are needed on a platform, and how they can be effectively explained to investors.

Exits:

• Muller expects to see more exits in 2025 and 2026, driven by pent-up pressure in the private equity community to return capital and a more favorable economic environment.

Growth Prospects:

• The private credit asset class is poised for significant growth, driven by increasing demand from retail investors and the need for liquidity among holders of risk.

M&A Activity:

• The type of M&A activity will depend on the financing market, with platform builds more likely in a low-cost debt environment and transformative M&A in a more expensive borrowing environment.

Overall, the democratization of private assets in private credit presents opportunities for growth, innovation, and expansion into new investor channels. However, it also requires careful management of risks, education, and product innovation to cater to the evolving needs of investors.

Key timestamps:

00:09 Introduction to the Fireside Chats
01:23 Trends in the Private Credit Industry
03:57 Investor Preferences and Market Dynamics
05:56 Retail Market Potential in Private Credit
09:09 Innovation in Investor Relations
13:29 Regulatory Considerations in Private Credit
17:11 Brand Recognition and Competitive Advantage
18:21 Risks and Challenges in Private Credit
20:26 Investor Concerns About Capital Inflows
22:54 Impact of Interest Rate Changes
23:59 Product Innovation and Market Saturation
24:59 Addressing Systemic Risks in Private Credit
26:13 Future Trends in Private Equity Exits
27:39 Growth Prospects for Private Credit
28:22 Market Dynamics: Platform Deals vs. Buy and Build