Wealth management firms are pulling back from private credit markets and intensifying their hunt for alternative investments, still reeling from the redemption restrictions imposed by several large direct lending funds earlier this year.

“Demand for alternatives to direct-lending private credit is rising notably, primarily because wealth managers are neither willing nor able to continue selling direct-lending private credit retail products,” said Christian Stracke, president of Pimco, in an interview in Sydney on Tuesday. During the first quarter, several major private credit managers limited investor redemptions from semi-liquid funds known as business development companies (BDCs), as concerns escalated over their outsized exposure to software firms threatened by artificial intelligence (AI).

Stracke noted that many investors are still waiting to recover their capital, and they may face a prolonged delay. “Most BDCs are grappling with redemption requests totaling roughly 15% of their assets under management, and restoring supply-demand balance will likely take several more quarters,” he said. Data from Robert A. Stanger & Co released in July shows more than $14.5 billion in investor funds remain locked in over a dozen funds.

Pimco, which manages $2.26 trillion in assets, ranks among the world’s largest credit investors. Several of its executives have voiced concerns about the health of the $1.8 trillion private credit industry, which has faced intense regulatory scrutiny over underwriting standards and asset quality in recent months. Stracke also highlighted that some BDCs are sitting on a growing pile of troubled loans, particularly software-related debt maturing in 2027 and 2028.

In the coming years, the software sector will confront significant refinancing challenges, with S&P Global Market Intelligence estimating that up to $386 billion in related syndicated loans will come due in 2028 and 2029. “The entire industry will need to address these problem loans over the next several years,” he said, predicting that default rates will stay elevated during that period. “This will keep many participants on the sidelines for a considerable stretch.”