This is not the first time the International Monetary Fund (IMF) have issued a warning on the opaque and highly interconnected segment of the financial system:
- Private corporate credit has created significant economic benefits by providing long-term financing to corporate borrowers. However, the migration of this lending from regulated banks and more transparent public markets to the more opaque world of private credit creates potential risks.
- Valuation is infrequent, credit quality isn’t always clear or easy to assess, and it’s hard to understand how systemic risks may be building given the less than clear interconnections between private credit funds, private equity firms, commercial banks, and investors.
- Today, immediate financial stability risks from private credit appear to be limited. However, given that this ecosystem is opaque and highly interconnected, and if fast growth continues with limited oversight, existing vulnerabilities could become a systemic risk for the broader financial system.
There is much more here.
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Background on the private credit market:
- its where specialized non-bank financial institutions such as investment funds lend to corporate borrowers
- it topped US$2.1 trillion globally last year in assets and committed capital
- About three-quarters of this was in the United States, where its market share is nearing that of syndicated loans and high-yield bonds.
- This market emerged about three decades ago as a financing source for companies too large or risky for commercial banks and too small to raise debt in public markets.
- In the past few years, it has grown rapidly as features such as, speed, flexibility, and attentiveness have proved valuable to borrowers.
- Institutional investors such as pension funds and insurance companies have eagerly invested in funds that, though illiquid, offered higher returns and less volatility.
