Even though the S&P 500 has returned an average of 15% per year over the past five years, American investors still feel the need to wade into the deeper waters of private equity and venture capital. The current administration has signaled a willingness to give regular folk the right to invest in things where you can’t just call the broker or log on to get out of any particular investment. We have been writing about the fact that many of these opportunities involve signing complicated agreements that limit your rights to the capital, the voting and the piece of the action you might think you are due. This is not entirely new. Preferred shareholders of traded securities have always had “first dibs” on any payment but today’s LLC and LLP agreements make preferred stock look like child’s play.
BlackRock is a common and well known piece of the investment world. It was a spin off from Blackstone Group and is today the world’s largest asset manager. The breadth of its investments is enormous, including publicly traded stock. But it owns and operates lots of financial entities that are not publicly traded. One of those entities is HPS Corporate Lending Fund. The fund is recorded to manage about $26 billion in debt. In recent weeks investors have grown skittish about the fund and started to make significant withdrawals to invest elsewhere. The reports we are reading suggest that, as we have noted, these private funds often have terms and conditions investors don’t pay enough attention to. And this week, HPS invoked its right to limit those withdrawals to $620 million per quarter. Picture having money in your bank’s money market fund and learning one day that when you signed up you agreed that you couldn’t take more than a fixed amount from the account in any given quarter. In defense of BlackRock, they would respond that HPS was not a typical money market fund but a fund where investors understood that the loans were long term and long term loans require investors to accept less liquidity.
That’s not a leap of logic. Unfortunately, most everyday investors don’t read or look deeply into the disadvantages of investments like these. All they see is that their bank money market is paying 3% and these lending funds are recording returns of double that amount. The issue with banks and lending funds like HPS is that your investment isn’t just sitting there making you money. At your local bank 80-90% of your money is “on the street” which is to say the money you think of as yours has actually been loaned to the bank’s customers. A fund like HPS can pay higher yields because they don’t have to keep 10-20% of their investments available should you decide to write a big check to install a pool or buy a car.
Again, the zeitgeist is to allow all of us to take more risk to secure better returns. One of those risks is restrictions on liquidity and when markets get shaky your call to “sell” may go unanswered.
BlackRock curbs redemptions at HPS private credit fund as investors weigh risks – InvestmentNews