Private Credit’s Lavish Profits Are Coming Under Scrutiny

Investors are asking whether it’s fair for direct-lending funds to make excess returns just because a central bank hikes interest rates. 

(Bloomberg) — Private credit funds have been raking in bonanza profits lately as a result of rocketing interest rates, but their investors are starting to question whether they really deserve so much of the windfall.

Firms in this booming $1.5 trillion market typically lend at a floating rate, meaning fund managers get much higher yields from borrowers as base rates soar. This in turn lets funds blast through so-called “hurdle rates,” the point where they can begin to collect profit — or “carry” — on their returns.

Now, many investors, known as limited partners, are asking for more flexibility on how the carry is calculated because of the perceived unfairness of managers making fortunes just because a central bank hikes rates.

“In recent months LPs have generally been showing more attention to the details of any position they take,” says David Bouchoucha, head of private debt and real assets at BNP Paribas Asset Management. “Looking at the hurdle rate and if it makes sense with the base rate is part of it.”

Private credit firms usually have a hurdle rate of between 5% and 7%. When a fund’s returns hit that threshold, it can start sharing in the profit, on top of the 1%-2% management fees collected through a fund’s life. Managers often get about 10%-15% of the returns once they’ve passed the hurdle — a significant dent for investors who get all the profit before that happens.

The unwillingness to accept the current state of affairs is a sign of investors’ increasing power in a private-credit industry that’s had a flood of new fund entries, sometimes leaving them spoilt for choice when opting where to put their cash. The trend’s making it harder for smaller credit firms to compete.

Flexible Friends

With investors demanding flexibility, one popular option is pegging hurdles to central bank rates, meaning they rise or fall according to monetary policy.

“Returns are really dependent on the base rate,” says Florian Hofer, director for private debt at Golding Capital Partners. “I think there’s a fair alignment of interest between the funds and the LPs for this.” Funds are “worried that if base rates go down again they’ll lose their carry, so I think a floating hurdle rate is a fair compromise,” he adds.

Christian Wiehenkamp, chief investment officer at Perpetual Investors, oversees a fund that invests in private credit funds and has used a hurdle rate pegged to base rates since 2021. He says it’s right to reward funds for performance rather than rate hikes: “We need to earn cash plus something to show we’re generating alpha that you wouldn’t get elsewhere.”

Investment firm Muzinich & Co. is also offering floating rate hurdles to those who want them. “There’s a general sense that investors are not pleased with fund managers who insist on maintaining the status quo,” says Kirsten Bode, its cohead of pan-European private debt.

Pegged Back

However, some managers say it’s unfair to peg hurdles this way as it doesn’t compensate funds for the extra risk in a tough macroeconomic environment. A recession would mean lots more corporate defaults and bad loans.

Floating rate hurdles also add a layer of complexity to administering funds and distributing capital. “Overengineering floating rates can provide difficulties,” says Luis Mayans, partner and deputy head for private debt at CDPQ.

Philip Edmans, who leads the capital markets team at Inflexion Private Equity Partners LLP, says “there’s lots of discussion about whether hurdle rates for debt funds will become floating,” but he reckons “spread tightening is probably more likely.” While buoyant private credit firms have been charging hefty premiums — the “spread” over base rates — on loans to companies, Edmans expects they’ll have to cut back during more straitened times for borrowers. And if yields fall, funds won’t need to fiddle with hurdle rates.

A new report from law firm Macfarlanes LLP finds some managers are simply raising their hurdle rates, usually by less than 100 bps. Other funds are choosing to tinker with the so-called “catch up” period, effectively delaying some of the retrospective profit share they’re due from investors once a hurdle rate is passed.

Overall, the movement on hurdle rates reflects the willingness of LPs to flex their muscles with their funds, especially smaller ones. While fundraising in private credit has been resilient on the whole, investors’ preference for bigger, more established firms is putting sub-$5 billion outfits in a tight spot.

Smaller funds are scrambling for new ways to entice pensions, insurance companies and family offices to invest, but it may not be enough. “Will a bad performer be able to attract capital by changing their hurdle rate?” says CDPQ’s Mayans. “No, we don’t think so.”


  • Vedanta Resources Ltd.’s talks with lenders for a $1 billion private credit loan have been complicated by a plan to separate its Indian subsidiary into six units
  • Clear Finance Technology Corp., the lender co-founded by Canadian television personality Michele Romanow, secured a new round of funding, giving it room to mount a potential turnaround after a slowdown in the tech-startup industry battered its business
  • Carlyle Group Inc. is asking Wall Street banks and private credit lenders to arrange debt packages of at least $2.5 billion to support its potential acquisition of stakes in some of medical-device maker Medtronic Plc’s business units
  • Netsmart privately placed a $130 million fungible incremental first-lien term loan with Golub Capital
  • Banks and direct lenders have come together to provide financial backing for private equity firm Cinven’s move to take German laboratory operator Synlab AG private
  • A group of private credit lenders provided $725 million of debt financing to support TPG Inc’s acquisition of the Global Governments and Critical Infrastructure (G2CI) cybersecurity business of Forcepoint LLC
  • Blackstone Inc. acted as the sole lender in a refinancing of Amicus Therapeutics Inc.’s existing credit facility, providing the company a $400 million senior secured term loan and a $30 million strategic equity investment
  • Blue Owl Capital Inc. acted as administrative agent on a transaction that involved boosting the size of Integrity Marketing Group’s existing credit facility by roughly $500 million to $6.2 billion
  • The owners of Chelsea FC are considering increasing their borrowing by as much as £250 million as they look to continue the free spending that’s defined their short tenure in charge of the English football club
  • Bankers eager to finance a buyout of German drugmaker Stada Arzneimittel AG are considering a debt package of as much as €6 billion, pegging the coveted deal as a bellwether for the market
  • Texas Capital Bank was sole arranger of a $1.2 billion senior secured term loan for HighPeak Energy that was syndicated to around a dozen private credit lenders
  • Blackstone Inc. is helping fund the combination of New Mountain Capital’s HealthComp Holding Company LLC and Marlin Equity Partners’ Virgin Pulse, valuing the health-care merger at about $3 billion


  • Banco de Fomento Angola SA’s asset management unit is set to launch the country’s first private credit fund in 2024, seeking to support smaller businesses overlooked by major banks
  • Northern Arc Investments, a private credit investment manager in India, is planning to launch a $100 million fund, seeking opportunities in green companies in the country
  • Pantheon Ventures is seeking to raise more than $2 billion for two funds investing in the credit-secondaries market, according to people with knowledge of the matter
  • T. Rowe Price Group Inc. and Oak Hill Advisors are launching a new private credit fund open to individual investors in the US
  • Private credit lender Värde Partners has raised around $1.5 billion through the Värde Asset Lending Fund II and other accounts to invest in asset-based lending
  • Blackstone Inc. is looking to raise over $10 billion across two private loan funds in Europe and the US, according to people with knowledge of the matter, as the firm seeks to further capitalize on the growth of private credit

Job Moves

  • Mitsubishi UFJ Financial Group has hired three relationship managers for its growth and middle-market technology team
  • Metrics Credit Partners, a non-bank lender in Australia, has hired Stephen Boyd as an investment director
  • Tiffany Gallo, a managing director within Apollo Global Management Inc.’s capital solutions arm, has left the firm
  • Navis Capital Partners has hired Jack Ng as director based in Singapore for its private credit business
  • Marathon Asset Management is expanding its private credit team as the $23 billion asset manager looks to position itself for upcoming market turmoil
  • Navis Capital Partners has hired Nicholas Nugroho to set up its Indonesia private credit business

Did You Miss?

  • KKR’s Sheldon Sees Private Credit Becoming Evergreen Allocation
  • Private Markets Are Humming While Europe’s IPO Market Lingers
  • Private Credit Defaults Could Reach 5% Next Year, BofA Says
  • Private Credit, Bank Rivalry Spurs Race to Bottom, Moody’s Says


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