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Cliffwater CEO Stephen L. Nesbitt interval funds
Cliffwater CEO Stephen L. Nesbitt.

Q&A: How Cliffwater Overcame the Hurdles to RIAs Investing in Private Credit

The alternative investment manager was among the first to launch an interval fund in 2019, with a focus on private credit.

When alternative investment advisor and manager Cliffwater LLC launched its first private credit fund, Cliffwater Corporate Lending Fund (CCLFX), in June 2019, few people in the wealth management industry were paying attention to opportunities in private credit. In fact, few RIAs were familiar with either private credit investments, interval funds or Cliffwater LLC, according to company CEO Stephen L. Nesbitt.

While the initial buy-in from the RIA community was slow, the fund now has $20 billion in assets. It delivered an annualized return of 9.45% since inception and a year-to-date return of 5.65% in 2024. What’s more, private credit has emerged as one of the hottest alternative investment options in the private wealth channel, although with some caveats.

In 2021, Cliffwater added another private credit fund to its portfolio, this time with a focus on more niche opportunities. Cliffwater Enhanced Lending Fund (CELFX) provides asset-backed lending, specialty direct lending, regulatory capital relief, real estate mezzanine loans, venture lending and structured credit, among other strategies. Since July 2021, CELFX provided an annualized return of 13%. Its year-to-date return in 2024 reached nearly 6%.

In February, the firm also took over as an advisor for a tender offer fund launched by Mass Mutual subsidiary Barings in 2022. Cliffwater converted the vehicle into an interval fund and renamed it Cascade Private Capital. The fund’s focus is on opportunities in private equity, private credit and other private market investments, ranging from buyouts to private debt. recently spoke with Nesbitt about how the market for alternatives in the private wealth channel has evolved over the past five years, how the firm connects with the RIA community and what RIAs should know about the risks and opportunities of private credit investments.

The following has been edited for length, style and clarity. What’s the profile of the company’s typical investor?

Stephen Nesbitt: We work with a little over 700 U.S.-domiciled registered investment advisors, who in turn provide investment services to their underlying individual investors. We have three 40 Act funds. We market those to these RIAs, who in turn will put their individual client money into those funds.

WM: Cliffwater launched its first private credit interval fund in 2019. Can you talk about how the private wealth market for alternative investments might have changed from that time period to today?

SN: Initially, it was very slow. We’ve kind of grown up with private retail alternatives. The growth in our fund is a mirror image of the growth and interest generally in private alternatives. In 2019-2020, things were pretty slow. They started to pick up after that. Starting in late 2021 up until the post-COVID period, growth has been fairly rapid for our funds. And there are some other good offerings out there that have also grown significantly over this time period. I really believe we are in the very early stages of the use of alternatives within the retail sector, and I expect continued growth and more offerings by the investment industry in the years ahead.

The marketplace really wasn’t familiar with private debt at the time. I wrote my first book on private debt in 2019, Private Debt: Opportunities in Corporate Direct Lending, to help educate both the institutional and the retail market. Basically, private credit and private debt didn’t exist for most people. So, that was a hurdle—getting people to understand what they were investing in. And secondly, we offered our product in an interval fund, and they were not familiar to retail investors or RIAs or really anybody at that time. That was the second hurdle we had to get over—educating them on the interval fund vehicle. The third obstacle five years ago was knowing who we were. They knew who Blackstone was, they knew who Apollo was, they knew who BlackRock was, but nobody knew Cliffwater. So, we had to educate the RIA community on who we were and that they could trust us to execute a private credit vehicle.

Today, I think we’ve overcome all three of those hurdles, and that’s why our growth rate has accelerated.

WM: How did you decide what type of fund you were going to use? What made you settle on an interval fund?

SN: There are a number of reasons. One is convenience. Our assessment is that retail investors and RIAs, as a reflection of the retail investor, like convenience. They don’t like a lot of paperwork. Private funds, even some BDCs, require a great deal of paperwork—and not only paperwork, but capital calls, distributions. There is a lot of complexity and investor qualification going into them. So, the first factor is convenience. It’s easy. You invest in a ticker, and you invest the next day.

The second reason was liquidity. The interval fund, unlike the private fund, unlike BDCs, provides the greatest assurance of liquidity and maximum liquidity. You can get out under most scenarios once a quarter as opposed to a private fund, where you have to wait five to seven years. A BDC says they will provide 5% liquidity, but it’s contingent on the board of directors saying “yes.” A BDC can put a gate down on any quarter. Interval funds can’t. So, in our mind, providing the investor with maximum liquidity was the second reason we chose the interval funds.

The third reason was we could attract the non-qualified investor. We could do that because, like most interval funds, we don’t charge a performance fee. Consequently, anybody can invest in our fund; it doesn’t require pre-qualification. That’s important to RIAs because they don’t really want to discriminate between their investors on who’s qualified and who’s not qualified.

The fourth reason is the interval fund follows the 40 Act rule, which limits the use of leverage. And our feeling has always been that private debt should be a substitute for investment-grade traditional fixed income, so the risk needs to be low. The leverage limits telegraph to our investors that the risks on our funds will be low, particularly compared to private funds and BDCs, which generally have over a full term of leverage. Their volatility is much greater than the volatility of an interval fund.

I would add one more thing—transparency. As a 40 Act vehicle, we are required to disclose all of our holdings, all of our fees, everything. You hear a lot today about governmental concern about transparency—is private credit a black box? Well, with our interval fund, it’s not. We are regulated; we are required to disclose all of our holdings.

WM: How do you connect with the RIA audience? And has that process changed in any significant way from how you were doing it five years ago?

SN: We believe the RIA community has become very institutional. You don’t sell to them; you have to establish a partnership or long-term relationship with them, unlike the wires or some of the banks, where they are just trying to get paid to sell something. RIAs are a different ilk and more institutional-like where they establish a long-term relationship with their clients. We have to do the same thing.

That meant we had to build a direct sales force with Cliffwater employees, not a third party. Arguably, third-party marketing firms tend to be mercenaries, so instead, we went the direct sales route and hired our own salespeople. We hired very skilled salespeople, who basically are not only selling a product but selling the product within the context of an overall portfolio. So, when we talk to RIAs, we are also talking to them about overall asset allocation, what’s going on with not only their traditional investments, but alternative investments, and we help them and provide them with tools to integrate or allocate between private alternatives and traditional investments. So, it’s more of a high-touch type relationship rather than a transactional relationship.

This is what’s unique about our approach. With retail investors or RIAs, most of the products out there, whether it’s BlackRock, Blackstone, Apollo, KKR, all these guys are selling their individual platforms. These are good firms, but they are limited. They have to originate their investments. So even if I know who the best firm out there is, why should I just allocate to that best firm? I won’t end up being sufficiently diversified. It’s better to invest across multiple managers or private equity firms to achieve diversification.

If you accept that—and by the way, some of the largest pension funds in the world end up investing in 25 to 50 managers—that is a heavy lift for individual RIAs to have the staff and acquire the knowledge to identify who the best are and allocate across multiple funds. That can be an administrative burden. So, people hire Cliffwater or invest in our funds not because we originate loans but because we can access loans across multiple lenders that have relationships that are experienced. We can diversify to a much greater degree, hopefully, know who the best lenders and managers are, and save the RIAs the time, angst, and administrative hassle of doing that research themselves.

WM: So, is all outreach done in-house or are there additional channels that Cliffwater uses to connect with RIAs?

SN: That’s the only channel. On the investment side, we have 41 people dedicated to researching lenders and investment firms and executing loans with those managers. And then on the flip side, we have 27 dedicated salespeople focused on relationship building with 700 RIAs. And then we also have about 26 admin people, who do the block and tackling, the administrative work in managing the portfolio.

WM: I understand that the Cliffwater Enhanced Lending Fund, unlike your initial Cliffwater Corporate Lending Fund, focuses on higher-risk strategies. Why is now a good time to do that?

SN: We launched the Enhanced Lending Fund three years ago, and we have close to $4 billion in that fund. When we look at private debt, it’s like real estate—many people talk about core real estate and non-core real estate. It’s the same thing with private debt. Core is direct lending. It’s the safest senior secured; it’s the biggest part of the market at over $1 trillion. And there are a lot of good managers who do that, and it’s almost quasi-indexing private lending. It’s a very efficient market. That’s our flagship fund, the CCFLX.

There are many more bespoke private debt strategies that cover smaller markets—aircraft finance, venture lending, other forms of asset-backed lending, real estate debt, royalties. These are more niche products and niche markets that, in our opinion, to be successful in them, you have to pick the right manager. It’s more manager-driven, so we decided to put those more non-core strategies into one fund, which we call the Enhanced Lending Fund. And putting them together is very convenient because the RIA doesn’t have to pick which strategy to go into; they can diversify across strategies. And secondly, some of these enhanced lending strategies might shut down from time to time, or may be overvalued from time to time. So being able to shift to different sub-strategies within enhanced lending is very useful for the investor.

WM: About two months ago, we started hearing more concerns, such as those raised by Jamie Dimon, about all these private credit funds and what’s going to happen if we have another lending crisis or downturn. What’s your outlook on risks that can come with private credit investments?

SN: I don’t think most of these people know what they are talking about. Jamie Dimon seems to be very smart about commercial banking, but I question whether he’s knowledgeable about private debt. Ultimately, direct lending is about making senior secured loans, providing the safest financing to middle market U.S. companies, the core engine of the U.S. economy.

The pricing for that ebbs and flows. When people feel good about the economy, spreads come in, or the yields are not as great from the lender’s perspective. And when people are spooked about the economy, or we enter a recession, those spreads widen. Those movements in spreads are correlated to default rates. Over the last several years default rates have been pretty low. Other times, during a recession, defaults will increase. There is a cyclicality in this market that hasn’t gone away and probably will not go away. Nobody, to my knowledge, is able to predict those cycles—Jamie Dimon or anybody else. So, what you try to do is build a diversified portfolio that can manage its way through good times and bad..

WM: Given where we are in the market right now, and if you follow the advice of remaining diversified when you invest in private credit, what kinds of returns can investors expect to see?

SN: If you read a recent paper I wrote, “Direct Lending for the Long Run,” I lay out what I think the return should be. We think short-term rates are going to come down. I think our number for a traditional direct lending portfolio was 10 to 12%. So, either high single digits or low double-digit returns. Our expectation is an 11% long-term average yield on direct lending, and it will ebb and flow around that.

WM: We’ve seen quite a number of new funds launched recently focusing on private credit. How do you view your competition in the private credit space?

SN: Competition is good; it’s what makes this country great. Competition keeps us on our toes. And quite honestly, we were one of the first to be selling to the RIA channel, and being alone in that effort wasn’t good. People questioned why there was just one offering. But now that other people have jumped into the pool, people feel more comfortable. “If Blackstone is doing this, if Carlyle is doing this, there must be something to it, so I’ll take Cliffwater more seriously.”

WM: Is there anything else that you feel is important for RIAs to keep in mind about private credit investments?

SN: RIAs have struggled over the last decade trying to find a safe investment that can have a reasonably significant yield or cash flow. It’s been a struggle post-financial crisis. If you look at traditional investment grade fixed income, it returned not much more than 2 to 3%, with a lot of volatility. So it hasn’t really fit the bill of safety.

People tried hedge funds for a while, and while they’ve done a little bit better, probably 4 to 5%, they are very tax-inefficient and complex. And there are only a few that do very well. That’s been a struggle.

Cash yields until recently have been zero. Right now, from my point of view, RIAs have been given a short-term lifeline with higher short-term interest rates. But it’s not going to last. It’s going to settle in at the inflation rate, which looks to be arguably 3%. That’s not going to cut it either.

So, really, the only investment out there that can provide safety and significant yield and is investable is direct lending or private debt. What you give up is modest liquidity. Instead of being able to trade it daily, like cash, you can get in on any day for our fund, but you can only get out once a quarter under most scenarios.

In terms of asset allocation that RIAs look at, it’s almost a slam dunk that direct lending private debt is going to grow as a percent of portfolios. Right now, we see that about a quarter to half of RIAs’ private alts allocation is in private credit. And we think that will continue to grow as a fraction of private alternatives. I think the allocation to private alternatives itself will grow. It will take a few years, but I think it will start to approach 15 to 20%.

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