The Rise and Risk of Private Credit
The Rise and Risk of Private Credit

Summary/Abstract: Private credit creates significant economic benefits by providing long-term financing to firms too large or risky for banks and too small for public markets. However, credit migrating from regulated banks and relatively transparent public markets to the more opaque world of private credit creates potential risks. Firms borrowing private credit tend to be smaller and riskier than their public market counterparts, and the sector has never experienced a severe economic downturn at its current size and scope. Such an adverse scenario could see a delayed realisation of losses followed by a spike in defaults and large valuation markdowns. The chapter identifies vulnerabilities arising from relatively fragile borrowers, increased exposure of pensions and insurers to the asset class, a growing share of semiliquid investment vehicles, multiple layers of leverage, stale valuations, and unclear interconnections between participants. Assessing this asset class’s overall financial stability risks is challenging because the data needed to analyse these risks fully are unavailable. Despite these limitations, such risks appear contained at present. However, given private credit’s size and role in credit creation—now large enough to compete directly with public markets— it may become macro-critical and amplify negative shocks to the economy. The rapid growth of private credit, coupled with increasing competition from banks on large deals and pressure to deploy capital, may lead to a deterioration in pricing and non-pricing terms, including lower underwriting standards and weakened covenants, raising the risk of credit losses in the future. If the asset class remains opaque and continues to grow exponentially under limited prudential oversight, the vulnerabilities of the private credit industry could become systemic.

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