Private Credit: Fees Down, Rates Ascend | Chief Investment Officer

Institutions have been piling into private debt limited partnerships in hopes of fat yields derived from rising rates, a study from consulting firm Callan LLC found. In the meantime, these investors do get one benefit: Fees are on the way down.

Among asset allocators, private credit is the in thing. Its assets under management jumped to $1.2 trillion globally last year, from just $332 billion in 2010, Preqin research found. That total should hit $16.1 trillion in 2027, PitchBook estimated. Among U.S. and Canadian public pension plans, per Preqin, private credit claims 3.8% of portfolios.

Helping that trend are Federal Reserve-stoked interest rates—private credit is largely a floating rate asset class, thus benefiting from the Fed’s upward rate movement.

Callan surveyed 330 private credit partnerships that were launched between 2016 and last year’s third quarter, aiming to allow investors a peek into how this burgeoning asset class is doing as a whole.

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About two-thirds of the assets in this asset class are devoted to direct lending, in which a private credit fund makes a loan to a business, typically for three years. The rest of private debt is devoted to lending strategies ranging from real assets to distressed companies.

With the expansion of private debt funds, the management fees raked in by the general partners (nowadays often a massive financial giant with a large private equity presence, on the order of Apollo Global Management) have dipped. Originally, the funds followed the PE model and charged 2% annually of assets under management. In recent years, that has descended to a median 1.15%, Callan reported.

The general partners’ take of the distribution—when loans are paid off or, before that, as interest payments are distributed to investors—has classically been 20%, following the PE paradigm. But over time, with more entrants into the private credit field, that has come down to about 15% (known as carried interest), by Callan’s reckoning.

The hurdle rate—the minimum return GPs must clear before helping themselves to the carried interest bonanza—has been between 6% and 7% in recent years, down from the 8% that had long prevailed before the 2008 financial crisis, the report stated. Many LPs argue, Callan noted, that the hurdle rate should be restored to 8%, in light of today’s higher interest rates.

Private Credit: Too Risky? Not for Asset Allocators

Tags: Apollo Global Management, Callan, direct lending, distributions, Federal Reserve, fees, hurdle rate, Private Credit, Private Debt

NYC Comptroller Brad Lander is calling for Bank of America to initiate a clawback of executive compensation after it was ordered by federal regulators to pay more than $250 million in fines and customer refunds to settle a slew of charges, including double-dipping on overdraft fees, withholding credit card reward bonuses and opening fake accounts.

“We were disturbed to learn that Bank of America has been ordered to pay more than $100 million in customer refunds and $150 million in penalties to federal regulators,” Lander wrote in a letter to the bank’s board of directors. “I believe that the Compensation and Human Capital Committee holds both the responsibility and the authority to promptly initiate the clawback of eligible incentive compensation from the executives responsible (including those in a supervisory role) for the legal violations.”

Earlier this month, the Consumer Financial Protection Bureau ordered Bank of America to pay its customers more than $100 million “for systematically double-dipping on fees imposed on customers with insufficient funds in their account, withholding reward bonuses explicitly promised to credit card customers and misappropriating sensitive personal information to open accounts without customer knowledge or authorization.”

The CFPB also ordered Bank of America to pay $90 million in penalties. At the same time, the Office of the Comptroller of the Currency levied a $60 million civil money penalty against the bank “for violations of law relating to its practice of assessing multiple overdraft and insufficient funds fees against customers for a single transaction.”

Lander’s letter urges the bank to disclose the details of any compensation clawed back from any senior executive; the general circumstances of any compensation clawed back from lower-level employees; and reports from all internal board or company investigations used by the bank to reach its clawback determinations.

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“Instituting a clawback of incentive compensation is a critical accountability measure, and the onus is on the Board of Bank of America to re-establish clear expectations of ethical conduct and responsible business practices,” Lander said in a release.

Representatives for Bank of America had no immediate comment.

Separately, Lander issued a statement criticizing asset management giant BlackRock for appointing Saudi Arabian Oil Co. CEO Amin Nasser to its board.

“The appointment of the CEO of the world’s largest oil producer to BlackRock’s board undermines its own stated climate commitments,” the statement said. “At a time when financial institutions need to take a collective approach to addressing the financial risks from climate change, BlackRock shareholders expect climate-competent, not climate-conflicted, directors.”

Representatives for BlackRock did not immediately respond to a request for comment.