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The majority of capital allocated to private credit is still through strategies that offer little or no liquidity, but that’s beginning to change, according to research from the Alternative Investment Management Association.

According to its survey of private-credit fund managers, demand for liquidity is increasing, and many are developing hybrid or evergreen funds to meet that demand. These funds allow new subscriptions over the life of the fund, while maintaining certain restrictions on redemptions. They also permit investors to remain exposed to the strategy for a longer period.

“Evergreen or hybrid structures are attractive to investors as they support efficient capital raising and deployment, while also providing investors with more control over their capital allocations to private-credit strategies,” the report said.

Part of the motivation for offering options beyond traditional closed-end funds is that managers are increasingly looking to target retail investors. Four in 10 respondents said they intend to raise capital from retail clients in upcoming fund offerings, with most targeting high-net-worth investors.

In Canada, traditional asset management firms — including Purpose Investments, BMO Global Asset Management and CI Global Asset Management — have introduced evergreen private market funds this year.

The AIMA report noted the educational challenges in marketing private-credit funds to investors, including explaining the funds’ return profiles, liquidity constraints and fees.

“Fees are a key driver of competition in the retail market and, all other things being equal, private-credit investment strategies are typically more costly to run than traditional fixed-income strategies,” the report said, pointing to the cost of credit underwriting, due diligence and reporting.

Many private-market funds charge performance fees in addition to management fees.

While the retail market “entails a different type of complexity in terms of operations and regulation than the institutional market,” the report said, “managers who succeed in overcoming these challenges when raising retail capital will enjoy a considerable first-mover advantage in markets outside of the U.S.”

The research is based on a survey conducted by the Alternative Credit Council (ACC) and Dechert LLP of 40 private-credit managers that manage approximately US$800 billion across several jurisdictions. The ACC and Dechert then conducted one-on-one interviews.