A growing number of investors are exploiting a pricing gap between public and private credit funds. This arbitrage strategy is worsening withdrawal problems in the private-credit market.
The trade involves buying shares of publicly traded business development companies (BDCs). These shares often trade at a discount to the net asset value of their underlying private-credit holdings.
Investors then sell short similar private-credit funds that trade at higher valuations. The goal is to profit as these valuations eventually converge.
This activity pressures private-credit funds by amplifying redemption requests. As arbitrageurs exit positions, fund managers face increased liquidity demands.
The pricing gap reflects differing market mechanics. Public BDCs adjust daily to market sentiment, while private-credit funds update valuations less frequently.
Such disparities attract hedge funds and other sophisticated investors. Their trades can accelerate the very withdrawals that private funds are trying to manage.
Regulators are monitoring this trend closely. The practice exposes vulnerabilities in how private assets are valued during market stress.
For fund managers, the challenge is balancing investor access with portfolio stability. Wider discounts in public markets often signal deeper unease about credit quality.
