Private credit managers increasingly looking to offload battered funds are drawing interest from rivals eyeing cheap deals in one of the most turbulent periods for the $1.8 trillion market.

By Olivia Fishlow Firms including Ares Management Corp., Barings LLC, BC Partners and Churchill Asset Management have run the rule over troubled funds in recent months, according to people familiar with the matter. The talks are still preliminary and may not result in any transactions, the people added, asking not to be identified as the discussions are private.

Representatives for Ares, Barings, BC Partners and Churchill declined to comment, as did a spokesperson for Apollo.

Private credit managers are typically loathe to sell publicly traded BDCs, since they offer both a more attractive fee structure than other vehicles and provide much-coveted perpetual capital. But as investors have turned away from the asset class in droves, that calculus has changed.

Once a public fund begins to trade poorly, its ability to grow can be limited because it is unable to issue equity below net asset value. With direct lending volume also shrinking, a manager can be left with an underperforming fund and few options.

Exit Route A transaction can take several forms. A manager can buy a BDC through a merger or they can purchase the contract to run the fund. Other options include purchasing assets from the fund, which can allow the seller to combine what remains into an affiliated vehicle or simply return cash to investors.

Some firms are exploring these options because they don’t see the value in turning around their challenged funds, according to the people with knowledge. For the largest asset managers in the world, which oversee hundreds of billions of dollars across different asset classes, a relatively small underperforming fund can become an outsized distraction, especially as they look to push into retirement accounts.

TCPC, for example, is tiny in the scheme of BlackRock’s $15.3 trillion empire. The fund, which has marked down soured loans and been probed by US regulators over valuation practices, sold about half of its portfolio to secondaries specialist Pantheon in August, using the cash to help bring down leverage at the vehicle.

“BDCs might not just be worth the trouble, and trying to repair the credits and constantly go on public calls to discuss performance not worth the time,” said KBW’s Johnson, without referring to a specific fund.

Buying Scale Consolidation is somewhat of a tradition in direct lending. Firms including Ares and Blackstone Inc. built some of the largest business development companies through acquisitions of rivals. BC Partners has also rolled up several funds, with Chief Executive Officer Ted Goldthorpe telling investors in March that a combination of two of its publicly traded funds “expanded our scale, and enhanced our portfolio diversification.”

“As a general matter, there’s nothing new about the idea that smaller business development companies can start to become merger targets,” said Christopher Healey, a partner at Davis Polk & Wardwell who specializes in private credit. He said he wouldn’t be surprised if more funds with less than $1 billion in investments started to think about selling.

For buyers, such deals offer a way to expand rapidly, boosting the assets that they can collect fees on, or potentially acquiring a new stream of permanent capital. For some, combining with a publicly traded vehicle is also an attractive way to provide liquidity for their existing private funds.

“The marketplace for these transactions is really robust and despite some of the retail pullback, we’re seeing that there is still an appetite to acquire BDCs and grow assets there,” said Healey.