Note: This story was first published by Connect Money on February 21, 2025.
Johnathan Rickman | Blue Vault
While further interest rate cuts may be anticipated later this year, the ongoing higher-rate environment has spurred increased investor interest in credit-focused, semi-liquid funds. This trend has helped bolster business growth, driving new offerings and fundraising efforts in the alternative investment space.
The business community is counting on continued economic growth to help grow jobs at home and keep America competitive globally. As other nations have struggled to grow their economies in recent years, the United States bucked the trend by growing close to 3% last year.1 Our nation needs a “flourishing innovation ecosystem … powered by business” to maintain that advantage, U.S. Chamber of Commerce President and CEO Suzanne Clark said in a January keynote speech.2
Higher interest rates can make it difficult to start a new business — and grow the economy more broadly — but innovatively structured investment vehicles such as business development companies (BDCs) and interval funds centered on credit are stepping in to fill stubborn lending gaps. There are also several nontraded real estate investment trusts (REITs) that focus on credit investments, creating additional lending options.
Meanwhile, escalated interest in these funds has helped the “alts” industry flourish in a challenging economy while continuing to offer investors a balance of liquidity, diversification, and long-term returns. Read on to learn how different sectors of the alts industry have performed in recent years.
Investment strategies around credit-focused, semi-liquid funds will be a big topic at Alts Summit 2025, an alternative investments conference for wealth advisors hosted by Blue Vault. The event takes place at the Omni PGA Resort in Frisco, TX, March 10-12, 2025.
BDCs: In Full Boom
Nontraded BDCs, which were largely dormant until 2020, have led the alts industry trend, growing from $21.4 billion in 2019 to $154.9 billion as of the third quarter of 2024, Blue Vault data show.3
BDCs provide alternative sources of funding for entrepreneurs and others seeking business loans, making them attractive when interest rates shoot up. Due to their direct lending approach, which removes brokers and other intermediaries, a large majority of BDC loans are made at floating rates.
Additionally, as SEC-registered investment firms, BDCs must also offer operational or managerial assistance to the small- and medium-sized companies they invest in, giving those companies an extra layer of support previously unavailable to them.
Similar to REITs, BDCs are required to distribute at least 90% of their taxable income as dividends to investors. For investors in BDCs, all these factors can potentially lead to strong returns, which has largely been the case in the post-pandemic era.
“As long as BDCs continue to take on more assets and defaults remain low, as they have been, then shareholders will continue to receive very strong distribution yields on top of strong earnings — all of which contributes to higher returns,” said Luke Schmidt, Vice President of Research at Blue Vault, a leading provider of alternative investment performance data.
There were 18 nontraded BDCs actively raising capital as of September 30, 2024. Returns for the nine-month period ending September 30, 2024, for all active funds were strong by most standards:
| Index | Total Returns |
| Median Nontraded BDC Returns (Blue Vault) * | 8.02% |
| Morningstar LSTA Leveraged Loan Index | 6.07% |
| ICE BofA US High-Yield Total Return Index | 8.03% |
*Returns only include those funds that were in operation for the entire nine-month period.
Two BDC offerings were introduced during the first nine months of 2024: AB Private Lending Fund, managed by AllianceBernstein; and Kennedy Lewis Capital Company, managed by Kennedy Lewis Investment Management.
Interval Funds: Big on Credit
Interval funds, the rising star of the alts industry — characterized by low investment minimums, frequent valuations, and 1099 tax forms — are an increasingly popular vehicle for credit investors. Credit-focused interval funds have grown both in total assets as well as a percentage of the overall sector. Approximately 76.2% of interval fund industry capital raise came from credit-focused funds through the first nine months of last year alone, up from 67.3% for all of 2023, Blue Vault data show.4
The number of interval funds tracked by Blue Vault has grown from 56 at the end of 2019 to 104 as of September 30, 2024. Of those, credit-focused funds lead the pack at 71 compared to real estate funds (19) and equity funds (14).
Fundraising for interval funds has been on a steady incline for some time, and in terms of total assets, has reflected the largest share of the alts industry since at least the fourth quarter of 2019:
| As of December 31, 2019 | Credit | Real Estate | Equity | Total |
| Total Assets ($ millions) | $18,740 | $12,155 | $9,323 | $40,218 |
| Total Assets (% of industry) | 46.6% | 30.2% | 23.2% | 100% |
| As of September 30, 2024 | Credit | Real Estate | Equity | Total |
| Total Assets ($ millions) | $78,281 | $19,642 | $18,007 | $115,930 |
| Total Assets (% of industry) | 67.5% | 16.9% | 15.5% | 100% |
Governed by the Investment Company Act of 1940, interval funds are perpetual, continuously offered, and sold by financial advisors such as RIAs, independent broker-dealers, and wirehouse advisors.
Nontraded REITs: The Long Game
The higher-rate environment hasn’t been as friendly to REITs. The real estate market downturn has had a troubling trickle-down effect on REIT performance, resulting in fundraising challenges and a dearth of new offerings.
The third quarter of 2024 capital raise was one of the sector’s lowest on record (approximately $1.38 billion), and far lower than the heady days of 2021 when quarterly fundraising reached as high as $12.5 billion, according to Blue Vault.5
A REIT is a trust company that raises equity through an initial public offering, which is then used to buy, develop, manage and sell assets in real estate, which can include everything from shopping malls to self-storage facilities and warehouses.
While many REITs invest in real estate loans, not all REITs are strictly credit focused. However, one of the top performers in Q3 2024 was the FS Credit REIT, which raised the third-most amount of capital ($114.7 million) and was the sector’s largest product with assets totaling $10.2 billion. Launched in September 2017, the FS Investments REIT has seen the sector’s fortunes rise and fall.
Many advisors are likewise playing the long game. Keenly aware of the higher-rate environment’s impacts on the asset class, many wealth advisors say they plan to continue allocating to REITs, noting their unique ability to optimize 60/40 portfolios and potentially generate long-term income.
Stacy Chitty, Co-Founder and Owner of Blue Vault, is bullish on a REIT-sector rebound: “If interest rates do come down this year — and I think there’s going to be a lot of pressure on the Fed to reduce rates quicker than they want to, even though they’ve held tight up until now — that will open the door for NAV increases, as well as more robust fundraising and resulting acquisitions,” Chitty says. “I can’t predict an exact timeframe, but I believe that will happen.”
References
1 U.S. Chamber of Commerce, State of American Business 2025: All Business Is Local.
2 U.S. Chamber of Commerce, The State of American Business.
3 Q3 2024 BDC Industry Review, Blue Vault
4 Blue Vault
5 Q3 2024 NTR Industry Review, Blue Vault
