Fixed Income
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.
The Marriner S. Eccles Federal Reserve building in Washington.
Photographer: Nathan Howard/BloombergThis article is for subscribers only.
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.