Street Cred: Key Takeaways from ‘DealCatalyst/LSTA’s The U.S. Private Credit Conference on Direct Lending 2025’

Evolution of the Asset Class

• Private market businesses are experiencing inorganic growth by acquiring managers with specialized expertise and integrating them with global wealth distribution efforts.

Factors Influencing High-Net-Worth Channel Product Offerings

• A poll revealed that there are many important factors to consider for the High-Net-Worth (“HNW”) channel, differentiated products emerged as a critical factor for the HNW channel, with others arguing that brand name and ease of use are equally important.
• Quality of the manager and past performance, while not indicative of future results, still matter significantly, and education is viewed as a given for both advisors and clients.
• Wealth management firms vary in size and preferences, with some favoring brand names and others prioritizing ease of use.

HNW and Incorporating Private Credit Alternatives

• The process involves getting to know the home office, getting the fund through the diligence process, and obtaining investment committee approval. After that, it’s a matter of working with the investment team to make allocations and determine where to focus.
• Advisors help clients navigate the increasing availability of private credit products, from direct lending to sponsor or non-sponsor options to all the products that are emerging today.
• You tend to see more non-traded funds in wirehouses and more interval funds in registered advisors. A product needs to go through a rigorous process to get approval and get allocation from the registered advisor and the financial advisor, which requires a massive back and forth and some might find that to be too much of an intensive process whereas the firms that are succeeding today have multiple products available.

Operational Considerations for Launching Wealth Products

• Managers need to build wealth distribution platforms and products, which can be traditional, alternative, or a combination of both.
• The process involves relationship building, rigorous application processes, and ensuring operational efficiency.
• Successful firms in the wealth space often offer multiple products and focus on capital preservation.

Creating Products for Diverse Institutional Areas

• Managers must ensure that new products do not dilute their core strengths.
• Evergreen 1940 Act structures and interval funds are considered, but leverage constraints can impact product offerings.
• Thorough planning is important to maintain the integrity of the manager's brand in connection with new product launches.

Client Comfort with NAV

• Educating clients about the daily or monthly NAV determination process is essential, with no definitive right or wrong approach.
• Publicly traded BDCs and market psychology play roles in client perception.

Regulatory Environment and Changes

• The regulatory environment has shifted, with a new pro-business SEC Chairman, Paul Atkins, leading to quicker approvals for co-investment relief and multi-share class exemptive relief.
• The ICI's blueprint with 16 proposals for reforming the 1940 Act, including allowing registered CEFs to invest in private credit funds, is expected to bring significant changes to the capital raising process for private credit funds.

Future of Private Credit Exchange-Traded Funds

• The panel was divided on the likelihood of a non-IG private credit exchange-traded fund (“ETF”) within the next two years.
• The success of such products will depend on technology, regulatory changes and the ability to scale.

Legislative Developments

• A bill in Congress aims to address AFFE issues, potentially benefiting publicly traded BDCs and the broader BDC industry.

Evolution of Traditional Managers

• The rise of alternatives, particularly direct lending, has been significant post-Great Financial Crisis due to regulatory changes aimed at de-risking.
• Asset-backed finance has expanded to include a variety of solutions, from corporate-backed to consumer-backed products.
• The development of BDCs, interval funds, and partnerships with wirehouses has democratized access to alternative investments, offering superior returns to mass affluent channels.

Role of Banks

• Banks often originate assets that private credit shops fund, creating mutually beneficial partnerships.
• Banks provide products to customers using private credit capital, addressing needs that do not fit traditional banking channels.

Sovereign Wealth Funds

• Sovereign wealth funds leverage bank relationships to access products and maintain relationships they cannot easily source independently.
• These partnerships are driven by AUM goals and the need for synergies between banks and sovereign wealth funds.

Insurance Companies

• Insurance companies have a long track record in direct lending and are increasingly using private credit to meet long-term liabilities.
• They target single A to triple B rated risks, moving from public markets to private markets for better risk-reward ratios.
• Insurance companies are long-term holders of risk, favoring permanent capital vehicles.

Finding the Right Partner

• Successful long-term partnerships in private credit often start with seeding a collateralized loan obligation (“CLO”) manager and expanding into broader private credit structures.
• Insurance companies and sovereign wealth funds use these products to grow their platforms over time, satisfying different needs.

Private Credit for Insurance Companies

• Insurance companies are increasingly comfortable with private credit, using rated funds, private credit CLOs and asset-backed securities of different types.
• Middle market CLOs are particularly attractive due to their alignment of interests between managers and investors.

Structuring and Access

• Smaller and middle-sized insurers face challenges in accessing private credit, but rated funds and innovative structuring are making it easier.
• The evolution of products like revolving subscription facilities and fixed-rate tranches is helping insurers access private credit.

Co-Investment Opportunities

• Co-investment deals, often in the form of separately managed accounts, are becoming more common, providing insurers with additional investment opportunities.
• These deals offer a sweetener for insurance companies, fitting well with their general diligence perspectives.

Banks and Regulation

• Banks are partnering with private credit managers to capture market opportunities that do not fit traditional banking frameworks.
• The regulatory environment and the need for tailored solutions are driving banks to explore private credit partnerships.

Market Dynamics

• The top alternative asset managers are likely to dominate relationships with traditional asset managers, particularly in the mass affluent and HNW segments.
• The market is seeing a shift from public to private solutions, with private credit taking market share from public markets.