## CHAPTER 2 GLOBAL FINANCIAL STABILITY REPORT The Rise and Risks of Private Credit

## Source details

**Canonical URL:** [CHAPTER 2 GLOBAL FINANCIAL STABILITY REPORT The Rise and Risks of Private Credit](https://www.imf.org/-/media/files/publications/gfsr/2024/april/english/ch2execsum.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/gfsr/2024/april/english/ch2execsum.pdf.md)
- [Structured JSON version](/-/media/files/publications/gfsr/2024/april/english/ch2execsum.pdf.json)

---

### Growth and value proposition
- Private credit has grown rapidly to provide long‐term financing to middle market firms.
- Private credit offers borrowers a value proposition through strong relationships and customized lending terms.
- While banks appear to have become less willing to lend to middle‐market, or medium‐sized, firms, private credit has emerged as a key lender.
- Credit migrating from regulated banks and relatively transparent markets—such as syndicated loans or corporate bond markets—to the opaque world of private credit creates potential risks.

### Key vulnerabilities and potential shock scenarios
- The sector could experience large, unexpected losses in a downturn.
  - Private credit is typically floating rate and caters to relatively small borrowers with high leverage.
  - Such borrowers could face rising financing costs and perform poorly in a downturn.
- Liquidity risk could rise with the growth of retail funds.
  - The great majority of private credit funds poses little maturity transformation risk.
  - However, the growth of semiliquid funds could increase first‐mover advantages and run risks.
  - Increasing retail participation in private credit markets raises conduct concerns as retail investors may not fully understand the investment risks or the restrictions on redemptions from an illiquid asset class.
- Multiple layers of leverage create interconnectedness concerns.
  - Private credit funds appear to use limited amounts of leverage, but are often part of complex networks that include leveraged players ranging from borrowers to funds to end investors.
  - These multiple layers of leverage, often hidden by reporting gaps, could magnify losses.
  - Funds may still face significant capital calls, with potential transmission to their leverage providers.
- Uncertainty about valuations could lead to a loss of confidence.
  - The opacity of borrowing firms and the fact that the sector has never experienced a severe economic downturn at its current scope and size make prompt assessment challenging for outsiders.
  - Fund managers may be incentivized to delay the realization of losses as they raise new funds and collect performance fees based on their existing track records.
- Risks to financial stability may also stem from entities with particularly high exposure to private credit markets.
  - Insurers influenced by private equity firms and certain groups of pension funds are highlighted as potential sources of systemic vulnerability.
  - The assets of private‐equity‐controlled insurers have grown significantly in recent years, with these entities owning significantly more exposure to less‐liquid investments than other insurers.

### Data and systemic risk assessment
- Assessing overall financial stability risks of this asset class is challenging because of the data limitation.
- 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.
- Multiple reporting gaps obscure leverage, interconnectedness, and investor concentration.

### Policy recommendations and supervisory priorities
- Authorities should consider a more intrusive supervisory and regulatory approach to private credit funds, their institutional investors, and leverage providers.
- Authorities should enhance cross border and cross sectoral cooperation to address data gaps and make risk assessments more consistent across financial sectors.
- Authorities should prioritize the closing of data gaps so that supervisors and regulators may more comprehensively assess risks, including leverage, interconnectedness, and the buildup of investor concentration.
  - Authorities should enhance reporting requirements for private credit funds and their investors, and leverage providers to allow for improved monitoring and risk management.
- Authorities should monitor closely and address liquidity and conduct risks in funds—especially retail—that may be faced with higher redemption risks.
  - Securities regulators should implement relevant product design and liquidity management recommendations from the Financial Stability Board and the International Organization of Securities Commissions.

*To see the full report, please refer to the English version here: http://IMF.org/GFSR‐April2024*

---


_Source: https://www.imf.org/-/media/files/publications/gfsr/2024/april/english/ch2execsum.pdf_