Private credit is having its Big Boy moment, according to Morgan Stanley’s CEO

The past few months has seen financial advisors and the firms they work for flee private credit funds and nontraded business development companies, high-yielding vehicles that invest in loans of private companies.

Sales of illiquid and nontraded BDCs have plummeted, just as investors are banging on their door asking to sell back or redeem a number of shares per quarter that often exceeds a fund’s standard limit of 5% per quarter.

It’s been a mini-run on the non-bank banks. Investors have been spooked by such funds exposure to loans to technology and software firms, which are under pressure from the rising competition of artificial intelligence companies and functions. 

Chief executives of the firms whose advisors sell the funds, of course, are taking notice. Ted Pick, CEO of Morgan Stanley, said Wednesday morning during a conference call to discuss first quarter earnings that the asset class is experiencing growing pains and coming of age.

“As you know, private credit as a sub-asset class has come of age over the last number of years as a new set of lenders has stepped in post the financial crisis in the place of Wall Street,” Pick said to analysts. “While it's still a growing class, it's having a learning moment. We call it an adolescent moment where both the lenders and the borrowers are being looked at carefully.”

“But the reality is, it's credit, and credit is going to broadly perform when the economy is in the kind of good shape it's in right now,” he said, adding that about 5% of the firm’s wealth management assets overseen by financial advisors are in alternative investments and 1% in private credit funds.

With close to $2.8 trillion in fee-based client assets, that represents $28 billion of clients’ exposure to private credit funds and BDCs, a substantial sum despite the slight allocation of assets.

Meanwhile, Brian Moynihan, CEO of Bank of America, said that recruiting experience financial advisors was picking up at the bank’s wealth management businesses, which includes Merrill Lynch.

“On recruiting, I think the team is doing a very good job and we're getting in double the amount of advisors this year, first quarter as we did last year, something like that,” Moynihan said Wednesday morning during a conference call with analysts. “But importantly, the attrition of the advisors is down to a low level, and it's a net benefit of that.”   

Morgan Stanley’s wealth management reported record net revenues during the first quarter of $8.5 billion with a pre-tax margin of 30.4%, reflecting strong asset management revenues, robust levels of client activity and higher net interest income, according to the company. The wealth management unit also reported net new assets of $118 billion and fee-based asset flows of $54 billion for the quarter.

Bank of America’s Global Wealth and Investment Management unit reported net income of $1.3 billion, with revenue of $6.7 billion, up 12% compared to the same quarter last year.

According to the company, the increase was driven primarily by higher asset management fees, up 15% to $4.2 billion, reflecting higher market valuations and strong assets under management flows.