Fund managers want to “democratize” your 401(k) by injecting it with their business development company (BDC) funds. The pitch is, they’ll “allow” you to lend your money alongside them to junk-rated corporations, for a fee, of course. In The Wall Street Journal, Matt Wirtz and Heather Gillers explain how BDCs have gone wrong for some investors, writing:
Wall Street fund managers want 401(k) plans to include private credit, but similar products they have already sold to individual investors are in sharp decline this year.
Some of the same money managers leading the charge to “democratize” private markets—like KKR and BlackRock—are among the worst performers in the publicly traded private-credit funds called business development companies.
Business development companies, or BDCs, typically make high-interest loans to midsize corporations with junk credit ratings, using income from the loans to pay big dividends to their investors. They have become a popular way for fund managers to draw mom-and-pop investors into the booming private-credit industry. Demand for BDCs surged and the cash they manage has more than tripled since 2020 to about $450 billion, according to the law firm Mayer Brown.
Now, a number of BDCs have stumbled. A VanEck exchange-traded fund that tracks the stocks has lost 5.96% this year, according to Morningstar, while the broader market is up.
The more than $2 trillion private-credit universe has been mostly restricted to big investors and wealthy individuals. But the BDC slump shows how the hot investment product can extract a harsh penalty from anyone who tries to get out at the wrong time, as individual investors often do.
The BDC selloff began this summer, after falling interest rates reduced income from the loans they own. Then, a $14 billion fund managed by KKR reported heavy losses from loans gone wrong, and, separately, a rash of alleged frauds in companies such as the auto supplier First Brands spooked investors. JPMorgan Chase Chief Executive Officer Jamie Dimon, who has a love-hate relationship with private credit, warned about more credit “cockroaches” lurking.
Investor anxiety hit a crescendo in November, when Blue Owl, the poster child for private-credit lending, scrapped a plan to merge two funds it manages.
Action Line: Not everything that’s available in your 401(k) may be appropriate for you as an investment. When you want to talk about your portfolio and what may be a good fit for you, email me at ejsmith@yoursurvivalguy.com. We can also talk about rolling over your 401(k) into an IRA. And click here to subscribe to my free monthly Survive & Thrive letter.
P.S. Read more about the possible dangers lurking in your 401(k) here.
