Boaz Weinstein thinks retail investors who have plowed into private credit and regretted it should ask their wealth advisors a simple question: "How much were you paid?"
The activist investor, who has targeted Blue Owl's funds, argued in a podcast appearance earlier this year that advisors were rewarded with lucrative commissions for steering clients into semi-liquid retail private-credit funds. A Business Insider analysis found that advisors have collected at least $796 million selling those products since 2020 — a windfall made possible by an obscure SEC exemption that quietly reshaped how private credit is distributed to wealthy individual investors.
Those incentives have helped lay the tracks for the $80 billion in retail private credit cash raised through business development companies, a type of investment fund that makes direct loans to small and midsize companies.
Unlike the entry of private assets into retirement funds, driven by an executive order and a pending agency rule change, the ability to charge different fees for different clients and to make it easier to sell to affluent individual investors came about because the SEC accepted a five-year-old application for an exemption to Investment Act rules.
While some commission costs are not reported to regulators, a Business Insider analysis indicates that the total number could be well over $1 billion.
Dhruv Maniktala, the chief investment officer at multi-family office True North Advisors, told Business Insider that the promised yields of private credit were the primary driver for retail demand, just as they were for institutional investors. However, "the explosion in growth has been helped by the brokers who had a large incentive share to do so," he said.
"It is absolutely true that the structure of these funds have been developed so as to incentivize the broker-dealers to sell more and more and more of these," Maniktala said.
The recent wave of redemptions in BDCs has prompted some critics, like Weinstein in an interview with Bloomberg, to wonder whether retail investors really understood the trade-offs they were making between performance and liquidity. (Weinstein declined an interview for this story.) The industry has pushed back against this narrative, with Blackstone president Jon Gray saying liquidity constraints are repeatedly mentioned in the firm's marketing materials on its recent earnings call.
But redemptions are likely to continue — Blackstone's flagship private credit fund, BCRED, announced earlier this month that investors asked to redeem 10% of shares in the second quarter — and questions of what is causing investors to pull their cash, and put it there in the first place, will continue to swirl.
Here's how a niche administrative change in securities regulations helped to kick-start private credit's retail boom.
How share class changes opened the gates
Privately traded BDCs, offered by wealth advisors rather than available on public markets, remained out of the public eye for decades.
One thing holding them back was the inability to offer multiple share classes, according to a 2020 memo from law firm Eversheds Sutherland. Offering different share classes, with different fees or commission structures, "facilitates the distribution of shares." In other words, if financial advisors don't get paid a commission to sell something, they are much less likely to pitch it to their clients.
In October 2014, global asset manager Future Standard aimed to change this for its FS Energy and Power Fund. The firm applied for an SEC "exemptive order," arguing that BDCs should be allowed to use multiple share classes, as mutual funds have since 1995, to target different investor markets.
The SEC did not move quickly. The application took over five years and underwent four separate amendments before the SEC signaled its approval in January 2020, ahead of the official green light in February 2020.
Once Future Standard's application opened the door, others quickly followed. In February 2020, BCRED, now the industry's largest with $45 billion in net assets, filed its first draft registration statement with the SEC, noting that it may submit its own application for an exemptive order. By April 2020, it was already planning to offer different share classes, and its application was accepted in October 2020.
Blue Owl, then still Owl Rock, had its own application accepted a month earlier. Over the next few years, as Ares, Apollo, BlackRock, and others began launching their own private credit BDCs for retail investors, they also applied for this exemption.
From 2013 through 2020, non-traded and private BDCs raised $35 billion. Since then, the same asset class has raised $152 billion, according to Houlihan Lokey. During the same time period, BDCs grew from a $21.5 billion fair-value portfolio to a $393.6 billion fair-value portfolio.
Do fees change behavior?
Offering multiple share classes helped private-credit firms fit neatly into the wealth-management ecosystem, said Maniktala.
The different classes are designed for different types of advisors. Class I shares, which carry no sales commissions or servicing fees, are typically sold to institutional investors and fee-only registered investment advisors, who, instead of receiving a cut for selling an asset, charge clients a percentage of their total assets. Other classes, such as Class S and Class D shares, can be sold by advisors and broker-dealers who can receive commissions for selling the fund.
Across the major non-traded BDCs offering multiple share classes, roughly 71% of outstanding shares are Class I shares that carry neither sales commissions nor servicing fees, according to Business Insider's analysis. At BCRED, Class I shares account for 68% of outstanding shares.
Here are the two types of fees that are typically charged:
| Share Class | Typical Buyer | Upfront Commission | Annual Servicing Fee |
| Class I | Institutions, fee-only RIAs | None | None |
| Class D | Broker-dealers, commission-based advisors | Up to 1.5% | 0.25% |
| Class S | Broker-dealers, commission-based advisors | Up to 3.5% | 0.85% |
Still, incentives can be powerful for those paid on commission, wealth-industry veterans told Business Insider.
"There has always been ample incentive pointing the advisor right to the fees," said Charles Urquhart, founder of advisor education and consulting firm Fixed Income Resources.
"Advisors used to work from sales offering sheets that listed the sales commission on the right-hand side of the page," Urquhart said. "The larger the commission, the more an advisor's eye went there first."
Since March 2020, those commission-bearing share classes have generated at least $796 million for advisors, according to a Business Insider analysis.
One industry insider disputed that commissions drove demand, arguing "the fees have put the asset class on par and helped it compete with other asset classes."
This person said that in fee-based accounts, a client who invests in one of these BDCs would be paying distribution fees "in line with the norms" for other assets like stocks, bonds, and ETFs.
A breakdown of fees paid
Only Blue Owl disclosed the size of upfront commissions paid, reporting $67.6 million in upfront commissions across its two non-traded BDCs since launch.
Most firms do not disclose those figures, and commissions paid by others could be higher or lower. Applying Blue Owl's ratio of commissions to net assets to the more than $106 billion held across the industry's largest retail private-credit BDCs that charge fees to more than 1% of clients, Business Insider estimates advisors may have collected over $315 million in upfront commissions, following the enforcement change.
Blackstone's BCRED has paid out $354 million through annual servicing fees since 2021, while Blue Owl has paid $138 million across its two BDCs. Business Insider identified $711 million in servicing and distribution fees paid to advisors.
A Blackstone spokesperson did not comment on fees but said that its "true north remains delivering superior net returns to our end investors, and that is exactly what we've done." They pointed to BCRED's Class I shares 9.3% annualized return," an over 50% premium to leveraged loans.
Other firms mentioned did not respond to requests or declined to comment.
Fee-bearing classes can materially affect investor returns. Since inception, Class I shares of Blue Owl Credit Income Corp have returned 9.17% annually, compared with 7.51% for Class S shares purchased with the maximum sales load.
An investor who put $100,000 into the fund in March 2021 through Class I shares would have earned roughly $16,300 more than an investor who purchased Class S shares. More than a quarter of the Class I investors' gains over that period were effectively redirected to compensate the broker who sold the investment.
