GLOBAL FINANCIAL STABILITY REPORT: THE LAST MILE: FINANCIAL VULNERABILITIES AND RISKS
56 International Monetary Fund | April 2024
For context, such assets are comparable to about
three-quarters of the global high-yield market, a more
mature but similarly risky market.
Although still focused on middle-market lending,
private credit has expanded its remit significantly over
the last 20 years, particularly over the last 5. As a result,
private credit firms in the United States and Europe can
now provide loans to much larger corporate borrowers
that would previously fund themselves through broadly
syndicated loans or even corporate bonds. Such
borrowers may now prefer the customized arrangement
of private credit that avoids the disclosures and costs
associated with public markets.
Private credit remains focused on North America,
but other regions, including Europe and Asia, are
experiencing similar growth dynamics. As of June 2023,
assets under the management (deployed and committed)
of private credit managers located in the United States
reached $1.6 trillion, growing at an average annual rate
of 20 percent over the last five years. Private credit now
accounts for 7 percent of the credit to nonfinancial
corporations in North America, comparable with
the shares of broadly syndicated loans and high-yield
corporate bonds (Figure 2.2, panel 4). In Europe,
private credit also increased rapidly at an average rate
of 17 percent per year over the same period, although
it has a smaller footprint of 1.6 percent of corporate
credit. There is evidence of cross-regional investments,
with North American managers financing a significant
portion of the private credit funds focused on Europe
and Asia (Figure 2.2, panel 3). Asian private credit
accounts for about 0.2 percent of credit to nonfinancial
corporations, although it has grown at 20 percent
annually over the last five years. Private credit in Asia
finances mostly smaller deals, targeting high-yield and
distressed segments that have limited financing options
in emerging market economies (Box 2.1).
Given the low liquidity, higher credit risk, and lack
of transparency of private credit, the space is dominated
by institutional investors. The most common private
credit investment vehicle, accounting for approximately
81 percent of the total market, is a closed-end fund
with a capital call structure and limited life cycle, similar
to funds used for private equity. An additional 5 per-
cent of the market consists of specialized collateralized
loan obligations (CLOs) that invest in middle-market
private credit.
4
Typical investors in these two vehicles are
pension funds, insurance companies, sovereign wealth
4
Sources: Preqin, S&P Capital IQ, and PitchBook LCD.
funds, and family offices. A rapidly growing segment
in the United States is known as business development
companies (BDCs), which account for 14 percent of
the market. BDCs (covered in greater detail later in the
chapter) are often public and open to retail investors.
In Europe, some funds have adopted more frequent
redemption periods (for instance, monthly or even more
often) to appeal to a wider investment base.
The growth in private credit has followed the rise in
private equity, with which it is closely linked. Manag-
ers whose umbrella firm is also active in private equity
hold more than three-quarters of private credit assets.
For about 70 percent of private credit deals, the bor-
rowing company is sponsored by a private equity firm.
How Private Credit Could Threaten
Financial Stability
This chapter assesses private credit vulnerabilities
and risks to financial stability and focuses on macrofi-
nancial imbalances that might amplify negative shocks
to the real economy (Adrian and others 2019). Specif-
ically, this chapter analyzes the risks from borrowers,
liquidity mismatches, leverage, asset valuations, and
interconnectedness.
The migration of credit provision from regulated
banks and relatively transparent public markets to
more opaque private credit firms raises several poten-
tial vulnerabilities. Whereas bank loans are subject to
strong prudential regulation and supervisory oversight,
and bond markets and broadly syndicated loans to
comprehensive disclosure requirements that foster
market discipline and price discovery, private markets
are comparatively lightly regulated and more opaque.
Private credit loans, furthermore, are unrated, rarely
traded, typically “marked to model” by third-party
pricing services, and without standardized terms for
contracts. Rising risks and their potential implications
may therefore be difficult to detect in advance.
Severe data gaps prevent a comprehensive assessment
of how private credit affects financial stability. The
interconnections and potential contagion risks many
large financial institutions face from exposures to the
asset class are poorly understood and highly opaque.
Because the private credit sector has rapidly grown, it
has never experienced a severe downturn at its current
size and scope, and many features designed to mitigate
risks have not yet been tested.
At present, the financial stability risks posed by
private credit appear contained. Private credit loans