Cox Capital is piloting loans of 50% to 65% of net asset value to holders of large non-traded BDCs. The same firm offered to buy BDC shares at steep discounts in September. In a new survey, 84% of investors plan to raise private-markets exposure.
Private credit funds built for individual investors offer periodic, limited exits. A new kind of loan shows how some holders are looking for another way out.
Cox Capital said on Oct. 23 that it has launched a pilot program letting holders of non-traded business development companies borrow 50% to 65% of the net asset value of their positions, for holdings of $1 million or more in BDCs with more than $1 billion of assets. Non-traded BDCs, which invest mainly in private loans, generally limit how much investors can redeem in any quarter.
The lender is not new to these funds. In September, Cox Capital launched tender offers for shares of four non-traded BDCs at discounts of about 12.5% to 17.5% to their August net asset values, according to SecondaryLink. Some of the funds' boards urged investors to reject them.
Why a loan instead of a sale
A loan against fund shares lets an investor raise cash without redeeming or selling at a discount. That is useful when redemption queues are long or when secondary buyers want a large markdown. It also adds leverage on top of a fund that already uses it, and the loan would come due whether or not the fund's value holds up.
The same firm now sits on both sides of that choice: it has offered to buy shares at a discount and now offers to lend against them. For a holder who needs cash, the comparison between the two is the price of liquidity in these funds.
The demand side
Investor appetite for the asset class has not faded. In a survey of 500 institutional investors and wealth advisers published on Tuesday by Brown Brothers Harriman, 84% said they plan to increase their exposure to private markets within the next two years, and they ranked liquidity as a top priority.
Academic attention is growing too. A paper published in June, "The Fragility of Semi-Liquid Private Credit Funds," examines the structures that sit between private loans and individual investors.
Two readings
One reading is that the market is maturing. Secondary buyers and lenders are building the tools that let investors in illiquid funds manage their cash needs, which makes the products more usable and supports further growth.
The other is that the tools are a symptom. Tender offers at discounts of 12.5% to 17.5% to stated value and a pilot program for loans against fund shares suggest that some investors want out faster than the funds allow, at the same moment that surveys show new money still wanting in.
What to watch
Whether the pilot expands, quarterly redemption requests and fulfillment rates at the largest non-traded BDCs, secondary discounts to net asset value, any regulatory attention to lending against fund shares, and third-quarter results from listed alternative managers in the coming weeks.