Top financial regulators are raising alarms over valuation risks in the fast-growing private credit sector, questioning whether lenders are concealing troubled loans and expressing concerns about the increasing involvement of insurance companies, according to a report by Bloomberg.
The report quotes Andrew Dean, Co-Chief of the Division of Enforcement Asset Management at the US Securities and Exchange Commission (SEC), as saying during a Bloomberg regulatory forum in New York on Tuesday, that: “Valuation risks are at the core of the issue.”
Dean was joined by representatives from the European Central Bank (ECB) and the International Monetary Fund (IMF), who stressed the need for greater scrutiny of private credit firms’ portfolio valuations and raised potential red flags about liquidity and redemption risks.
As the private credit market has surged to $1.7tn in size amid prolonged high interest rates, regulators have repeatedly warned about the sector’s lack of transparency in loan valuations and potential liquidity mismatches. The ECB has also been examining how banks, private equity firms, and insurers are interconnected with private credit, highlighting how opacity in the sector could pose risks to financial stability.
Last month, the ECB requested more detailed information from about a dozen lenders regarding their private credit exposures. Similarly, the UK’s Financial Conduct Authority launched a review of private asset valuations, and the Bank of England warned that the opaque nature of private equity valuations could endanger the broader financial system.
Regulators are particularly uneasy about the rise of payment-in-kind loans, where borrowers defer payments, and the increasing leverage in the private credit space.
Dean cited Credit Suisse’s loss after the collapse of Archegos Capital Management as an example of how systemic risk can arise from hidden exposures in private markets. He also stressed the importance of transparency, especially given the growing involvement of retirement accounts and endowments in private credit deals. The SEC considers private credit deals “illiquid level-three assets” — the most difficult to value and trade.
“While the market has not faced a significant downturn yet, we need to be prepared for potential stress,” Dean said.
