Wealthy retail investors in the US piling into private credit are pushing the market for semi-liquid funds to about $350 billion and exposing themselves to new risks, according to a Morningstar Inc. report.
The total market for semi-liquid funds has surged 60% since the end of 2022, according to Morningstar, which on Tuesday is unveiling new risk and volatility analytics for financial advisers to assess private markets.
That growth comes alongside potential sticker shock for investors: fees can be up to three times higher than traditional stock-and-bond funds. The average annual expense ratio for semi-liquid funds was 3.16%, while the comparable figure for active mutual and exchange-traded funds was 0.97%, according to Morningstar.
“Asset growth comes from investors looking for higher and seemingly smoother returns from private markets than public stocks and bonds, but these funds also court significant risk even if the returns appear to be less volatile,” Morningstar analysts said. The report focused on funds available to investors with less than $5 million to invest.
The data company has been expanding further into private markets, announcing plans to rate private debt and compete more directly with credit-rating firms like Moody’s, Fitch and S&P Global. Morningstar also plans to award gold, silver, bronze — as well as neutral or negative — ratings to semi-liquid funds just as it has done for years for more traditional stock and bond mutual funds and ETFs.
Morningstar’s work reflects the asset-management industry’s aggressive push to sell retail investors on private markets through their brokerage and wealth accounts and, perhaps soon, their 401(k)s. BlackRock Inc. Chief Executive Officer Larry Fink envisions a world where portfolios are 20% allocated to private assets, disrupting the traditional 60/40 split between stocks and bonds.
Private credit has eclipsed real estate and infrastructure as the largest asset class for semi-liquid funds, with $188 billion in net managed assets as of Dec. 31, up from about $75 billion two years earlier.
Blackstone Inc., Cliffwater, Blue Owl Capital, Apollo Global Management Inc. and HPS Investment Partners, which is being acquired by BlackRock, manage the five largest semi-liquid credit funds for retail with a combined total of more than $100 billion in assets, according to Morningstar.
Whether investors will reap significant outperformance by committing to semi-liquid vehicles remains to be seen, according to Morningstar. Most such funds that focus on private equity or venture capital have failed to beat the S&P 500 Index since their inception. Semi-liquid private credit funds have fared better, though their results can be somewhat distorted by the use of leverage, the company said.
“Not everyone likely has done the math to fully understand and appreciate what’s happening here,” Kunal Kapoor, chief executive officer of Morningstar, said in an interview. “I think what’s lacking is a common language to allow for those comparisons; it’s really difficult from the way fees are reported and how managers are paid.”
Written by: Silla Brush @Bloomberg
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