Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. Private credit loans are negotiated bilaterally outside traditional regulatory requirements and are illiquid because no secondary market exists, leaving investors expected to hold them to maturity or face steep losses if they need to exit. Scarce data on this growing form of nonbank lending makes assessing its risks difficult.

Fang Cai and Sharjil Haque Federal Reserve Board
Date Posted:

Private credit has grown exponentially since 2000, reaching over $1.7T in June of 2023. @FederalReserve analysis suggests private credit raises overall corporate leverage, potentially increasing corporate sector vulnerability to financial shocks.

What makes private credit risks hard to assess?

Core argument: Private credit is growing rapidly as a frontier for nonbank lending, but the scarcity of available data makes assessing risks in this market difficult.

As private credit continues to grow rapidly as a new frontier for nonbank lending, the scarcity of available data has made it challenging to assess risks in this market. Private credit involves bilateral negotiation of terms and conditions without the need to comply with traditional regulatory requirements. These loans are illiquid due to the lack of a secondary market. There is limited market discovery, and investors acquiring these loans should expect to hold them to maturity or face steep losses in need of an emergency exit.

Takeaways by Macro Roundup® AI

  1. Private credit is growing rapidly as a frontier for nonbank lending, but the scarcity of available data makes assessing risks in this market difficult.
  2. Private credit involves bilateral negotiation of terms and conditions without the need to comply with traditional regulatory requirements.
  3. Private credit loans are illiquid because no secondary market exists, so investors should expect to hold them to maturity or face steep losses if they need an emergency exit.

Related Articles:

  • Trends In Private Markets Going Into 2024 — Global private capital assets under management total $13tn, less than 5% of global financing markets, against $103tn in outstanding fixed income, $101tn in equity market capitalization, and $98tn in banking sector balance sheets. Over the past decade private capital grew by $8tn, far less in absolute terms than fixed income ($42tn), equities ($35tn), and banking ($34tn).
  • Where Are All the Defaults? — One explanation for subdued high-yield bond spreads is that the lowest-quality borrowers, those most likely to default, have migrated from high-yield markets into private credit. Moody's reports the number of issuers with its lowest speculative-grade ratings has fallen, and that 62% of its rated universe is rated single-B or below.
  • How Private Credit Gives Banks a Run for Their Money — Private credit emerged as an alternative to banks as regulators tightened rules on risky lending by deposit-taking institutions, and now competes with mainstream lenders across businesses from real estate firms to tech startups. Closed-end private debt funds held roughly $1.6tn in assets globally, up from about $500bn at the end of 2015.
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