Public pressure on private credit grows with loan sizes
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The private credit market faces a public problem.
The big picture: The booming market is prompting some investors and agencies to call for more transparency into a corner of Wall Street that operates mostly in the dark.
Why it matters: The ballooning size of the loans that private credit funds extend to companies has set off alarm bells with some limited partners who invest in these funds — but have little information to measure their performance.
- And the market's rapid growth has also raised concerns about whether systemic risks could be building with scant visibility from the outside.
- "Rapid growth of this opaque and highly interconnected segment of the financial system could heighten financial vulnerabilities given its limited oversight," wrote researchers with the International Monetary Fund in a report earlier this year.
How it works: Unlike banks that lend to companies and sell off the debt to investors, private credit funds lend directly to companies without syndicating the loan.
- The funds are not obligated to disclose data on their portfolio, in contrast to a typical private equity fund or hedge fund that regularly marks the performance of their portfolio for their institutional investors.
Between the lines: The advantage of an unmarked portfolio is that fund managers and their LPs don't have to worry about mark-to-market losses and dramatic swings in value if borrowers in the portfolio run into trouble.
- That's exactly what some institutional investors are looking for: "They don't want volatility in their marks," says Tom Newberry, chief credit officer at Sound Point Capital.
Yes, but: Increasingly, that's not what all investors want — and as the market grows, change is inevitable. Not only do some investors want more visibility, but they also want to be able to sell out of underperforming loans.
- Demand for liquidity — the ability to trade — in the private market is growing, says Akila Grewal, partner at Apollo Global Management, adding that the line between the public and private financing worlds is blurring.
The backstory: As recently as a decade ago, private credit funds used to be small in number, with modest fund sizes and small loans extended to companies with a few million dollars in cash flow.
- In the last few years, dozens of these funds have raised gobs of cash and signed massive checks for loans to companies with hundreds of millions in cash flow.
By the numbers: The size of the global market is approaching $2 trillion.
- The bigger these funds get, the more competition they pose to the legacy Wall Street banks just getting back into the game after their lending froze up in 2022.
- Case in point: Blackstone Group just raised $22 billion, more than double its initial target. The firm's direct lending platform now has more than $123 billion in assets.
What we're watching: The push for more public transparency within private credit will grow louder when the economy slows down, and more of these loans come under pressure.
