Institutional investors, which have traditionally made up private debt’s largest pool of money, are no longer a source of growth for the $1.7 trillion industry.

Money raised through funds targeted to institutional investors, including asset managers and pension funds, is expected to stay flat this year compared to last, according to data from PitchBook. With institutional interest plateauing, private credit investors have to hunt elsewhere for growth. These firms have turned to vehicles designed to appeal to retail investors and insurance companies, capital pools ripe for the taking.

Investment in traditional closed-end vehicles, also known as drawdown funds, has declined steadily since 2021 and is expected to stay flat, according to the PitchBook report, which looked at global private market fundraising in the second quarter of this year. With many central banks set to cut interest rates in the near future, the appeal of private debt, which is mostly floating-rate, has decreased, the report said.

Just 59 traditional funds focused on private debt closed in the first half of the year, down from 68 in the same period in 2023, according to PitchBook. Fundraising volume shrunk to $90.9 billion from $98.9 billion over the same period.

“You are starting to approach the limit of the traditional drawdown institutional end market,” Tim Clarke, one of the authors of the PitchBook report, said in an interview, adding a caveat that data around private credit is limited and can be unreliable, given the opacity of the product.

Some private credit firms are forming open-ended, evergreen vehicles, which provide more flexibility to retail investors. Investors can periodically withdraw or contribute new capital to evergreen funds.

A handful of the market’s largest players, including Apollo Global Management Inc., BlackRock Inc. and Goldman Sachs Group Inc.’s asset management division, are already looking to raise money from retail investors in the US. Goldman Sachs and Carlyle Group Inc. are also encroaching on the European market. Apollo is going one step further, breaking ground on a private credit-focused exchange-traded fund with State Street Corp.

Though insurance companies have become a well of capital for the private credit industry, some have moved away from participating in traditional drawdown funds. Some private credit funds have tapped insurer money by striking deals to manage their assets, like Blue Owl Capital Inc., which bought Kuvare Asset Management in July, taking control of $20 billion in assets under management. Other insurance firms are investing in private credit through separately managed accounts, special one-investor funds that offer lower fees and are touted as much more bespoke.

Non-traditional fund structures like evergreen vehicles also often have lower fees. Managers including KKR & Co. and Carlyle have even taken away the carry, a performance fee, on recent evergreen funds. There’s also considerable pressure for managers of business development companies, known as BDCs, to reduce fees.

  - Bloomberg