The IMF is worried about private credit. Well, join the club.
Over the past 15 years, alternative asset managers have increased lending exponentially to exactly the smaller, riskier and highly leveraged corporate borrowers that – due to enhanced regulation – banks stepped away from after the global financial crisis of 2007/08.
In the subsequent long period of rates repression and low defaults, investors made good money lending to unrated companies that were too risky for the banks and too small for the public bond markets. Thanks to this, private credit fund managers then raised so much money that they also began to compete with banks in the broadly syndicated loan and high-yield bond markets, financing larger companies, often at the moment private equity sponsors took them private.
Suddenly, private credit, when you include funds raised but not yet deployed, is a $2.1 trillion global market. That is comparable in size to the US high-yield bond market and the leveraged-loan market.
On the surface, it looks stable and resilient. Most direct lending is provided through closed-end funds to which pension funds, insurance companies and sovereign wealth funds make long-term capital commitments. Those investors can’t suddenly yank their money out during a sharp but short-lived credit downturn in the kind of knee-jerk reaction that might otherwise force managers to sell good assets to meet redemptions and so push credit funds into a doom loop.
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