Some private credit funds that cater to retail investors deployed their capital primarily in debt that offered few lender protections and lower yields, a misstep that could contribute to the current wave of redemptions, David Gross, a managing partner at Bain Capital, said Thursday.

Funds that cater to institutional investors focused on loans to middle-market borrowers that had more protective covenants and wider spreads, a feature that can also buffer potential losses, Gross said at Semafor World Economy in Washington, DC.

These funds were measured in how they deployed their capital, avoided concentration in the now-troubled software sector, and had investors who understood the asset class, including the illiquidity of their investments.

In contrast, some retail funds focused on “consortium financing deals” to large cap borrowers where “spreads were not as interesting” and there were “very limited” lender protections, Gross said. This “will lead to returns that might be quite challenged and cause investors to not want to go back into that sector anytime soon.”

Gross said this is the first real “vintage” of private credit funds that cater to retail investors. He expressed concern that funds, and intermediaries who market their shares, didn’t properly educate retail investors on the risks and illiquidity of private credit.

John Waldron of Goldman Sachs expressed a similar concern this week at Semafor World Economy, stating that some private credit funds were mismarketed to the mass affluent.

The next round of private credit funds will likely improve on the mistakes that the current ones made, Gross said, adding that some of the concern about the sector has been “a bit overblown.”

“This is going to be a durable secular theme and it’ll be refined,” and both the regulation and education processes will get better, Gross said. “Some of the operators of the funds that don’t work out so well this time, they’re not going to be the ones providing it next time.”