2

CHAPTER

THE RISE AND RISKS OF PRIVATE CREDIT

Chapter 2 at a Glance
• The chapter assesses vulnerabilities and potential risks to financial stability in corporate private credit, a rapidly
growing asset class—traditionally focused on providing loans to midsize firms outside the realms of either
commercial banks or public debt markets—that now rivals other major credit markets in size.
• 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 realization 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 overall financial stability risks of this asset class is challenging because the data needed to fully
analyze these risks 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 nonpricing 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.

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

The authors of this chapter are Fabio Cortes, Mohamed Diaby, Caio Ferreira (co-lead), Nila Khanolkar, Harrison Samuel Kraus, Benjamin
Mosk, Natalia Novikova, Nobuyasu Sugimoto (co-lead), and Dmitry Yakovlev, under the oversight of Charles Cohen.

International Monetary Fund | April 2024 1

 GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

How Private Credit Started and Has Grown Figure 2.1. Private Credit Structure
This chapter evaluates how financial stability is Private credit funds are intermediaries between end investors and
affected by the recent evolution of private credit into corporate borrowers that offer floating rate loans to middle-market firms.
a major asset class. Private credit (see Table 2.1 for Private Credit, End Investors, and Borrowers
definitions) has grown exponentially and is becoming End investors
• Long-term PFs ICs SWFs Retail
an increasingly important and interconnected part of investment Pension Insurance Sovereign
the financial system. The sector predominantly involves horizon funds corporations wealth
• Institutional funds
alternative asset managers who raise capital from institu- investors
tional investors using closed-end funds and lend directly • High-wealth Leverage
individuals
to predominantly middle-market firms (Figure 2.1). This Banks

chapter focuses on performing corporate credit rather

Intermediaries
than distressed assets, infrastructure, and real estate. • Limited maturity
Funds Funds BDCs CLOs
Private credit has provided significant economic transformation Closed-ended Open-ended Business Collateralized
GP/LP development loan
• Leverage
benefits during its approximately 30-year existence. provided by
structure companies obligations
It developed as a lending solution for middle-market banks

companies deemed too risky or large for commercial

Floating rate loans
banks and too small for public markets. Loans are Covenant heavy/heavier
typically negotiated directly between borrowers and Degree of control; customized terms; few lenders
one or more alternative asset managers. Although
usually more expensive than bank loans, private credit Borrowers
• Middle-market
firms Corporates
• Close to Small and medium-sized firms; some highly leveraged
syndicated loan
Table 2.1. Key Concepts and Definitions universe
Key Concept Definition
Source: IMF staff.
Private credit Nonbank corporate credit provided through
Note: GP = general partners; LP = limited partners.
bilateral agreements or small “club deals”
outside the realm of public securities or
commercial banks. This definition excludes
bank loans, broadly syndicated loans, and offers borrowers a value proposition through strong
funding provided through publicly traded relationships and customized lending terms designed to
assets such as corporate bonds.
provide flexibility in times of stress.1 In contrast with
Broadly syndicated loan A form of financing provided by a group of
most broadly syndicated loans, private credit offers
lenders, often banks and other financial
institutions, to a single borrower. Loans are terms that include enhanced covenants providing lend-
syndicated when too large or risky for a ers with downside protection.2 Private credit managers
single lender. Such loans are structured and also claim to have much greater resources to deal with
arranged by one or more lending agents—
typically investment banks—that underwrite problem loans than either banks or public markets,
and facilitate the transaction. Given the broad thereby enabling fewer sudden defaults, smoother
investor base, larger syndicated loans typically restructurings, and lower costs of financial distress.
have a relatively deep secondary trading
market.
Because private credit deals are idiosyncratic and
difficult for outside parties to value or trade, lenders
Leveraged loan A broadly syndicated loan with a high level of
corporate leverage. Such a loan is usually typically rely on long-term pools of locked-up capital
rated below investment grade and has a high for financing.
credit spread. Private credit has grown rapidly since the global
Middle-market firm A firm that is typically too small to issue public financial crisis, taking market share from bank lending
debt and requires financing amounts too
large for a single bank because of its size
and risk profile. The size of middle-market 1Customized lending terms can include, for example, the option
firms varies widely. In the United States, they
to capitalize interest payments (that is, pay in kind) in times of
are sometimes defined as businesses with
poor liquidity.
between $100 million and $1 billion in annual 2Covenants can vary depending on the transaction and can
revenue. In contrast to syndicated loans, loans
include, for example, limits for leverage and interest coverage ratios,
to middle-market firms are typically unrated,
restrictions on capital expenditures and dividend distributions,
even when multiple lenders are involved.
restrictions on additional debt, and limitations on asset sales.

2 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

Figure 2.2. Overview of Private Credit and Other Traditional Markets and Assets

Private credit funds have delivered comparatively higher gross ... and grown exponentially over the past two decades.
returns ...
1. Returns of Private Equity, Private Credit, and Other Asset Classes 2. The Growth of Private Credit Markets
(Indices rebased to 100 as of December 2000) (Trillions of US dollars)
1,000 Private equity Private credit Rest of the world 2.4
Natural resources Real estate Europe
800 S&P 500 MSCI World TR North America 2.0
Venture capital Dry powder (undeployed capital)
1.6
600
1.2
400
0.8
200 0.4

0 0
2000 02 04 06 08 10 12 14 16 18 20 22 2000 02 04 06 08 10 12 14 16 18 20 22

Private credit fund managers based in North America manage a In the United States, private credit size is comparable to leveraged
material part of the market in other regions. loans and high-yield bond markets.
3. Geographical Focus of Private Credit Funds’ Managers 4. US Private Credit, Leveraged Loans, and High-Yield Bonds
(Percent, as of June 2023) (Trillions of US dollars, left scale; percent, right scale)
North America managers Europe managers Private credit Leveraged loans
Asia managers Other managers High-yield bonds US private credit/bank credit (right scale)
100 2.0 10

80 8
1.5

60 6
1.0
40 4
0.5
20 2

0 0 0
North America Europe focus Asia focus Other focus 2001 03 05 07 09 11 13 15 17 19 21 23
focus ($1.1 trillion) ($460 billion) ($114 billion) ($59 billion)

Sources: Bank of America Global Research; Bloomberg Finance L.P.; PitchBook LCD; Preqin; S&P Capital IQ; and IMF staff calculations.
Note: In panel 1, the private capital indices are rebased to 100 as of December 31, 2000, and are available until June 2023. In panel 2, the measure of assets under
management includes those from private credit funds, business development companies, and middle-market collateralized debt obligations, with the last two being
mostly US focused, from 2000 to June 2023. In panel 4, bank credit includes both securities, and loans and leases for US commercial banks.

and public markets. Private credit benefitted from continue to encourage the migration of credit from banks
the long period of low interest rates that saw a huge to private credit lenders (Cai and Haque 2024).
expansion of attention to alternative investment strategies. As banks appear to have become less willing to lend
In this context, private credit has appeared attractive, to middle-market firms with riskier profiles in the
with some of the highest historical returns across debt United States and Europe, private credit has emerged
markets and appears to be relatively low volatility as a key lender. Private credit assets grew to approxi-
(Figure 2.2, panel 1). At the same time, postcrisis mately $2.1 trillion globally in combined assets and
regulatory reforms raised capital requirements for banks undeployed capital commitments in 2023, with a focus
and made regulation more risk sensitive, incentivizing on North America and Europe (Figure 2.2, panel 2).3
banks to hold safer assets. Some end investors (notably
insurance companies) were also incentivized to move 3This estimate of the growth in private credit assets includes the

into private credit because the capital charges are lower assets of private credit funds ($1.7 trillion globally, as of 2023),
and less risk-sensitive than the charges applicable to business development companies, and private collateralized loan
obligations, and therefore underestimates the overall size of private
commercial banks (Cortes, Diaby, and Windsor 2023). credit globally. This is because some end investors also lend directly
There is a concern that tighter bank regulation will to middle-market firms.

International Monetary Fund | April 2024 3

GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

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

4 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

are funded largely with long-term capital, mitigating entire network to simultaneously reduce exposures,
maturity transformation risks. The use of leverage triggering spillovers to other markets and the broad
appears modest, as do liquidity and interconnect- economy.
edness risks. • Uncertainty about valuations could lead to a loss of
The rapid growth of the asset class requires careful confidence in the asset class. The private credit sector
monitoring. As private credit assets under management has neither price discovery nor supervisory oversight
grow rapidly, and competition with investment banks to facilitate asset performance monitoring, and the
on larger deals intensifies, supply-and-demand opacity of borrowing firms makes prompt assess-
dynamics may shift, thereby lowering underwriting ment of potential losses challenging for outsiders.
standards, raising the chance of credit losses in the Fund managers may be incentivized to delay the
asset class, and rendering risk management models realization of losses as they raise new funds and
obsolete. The private credit sector may also eventually collect performance fees based on their existing track
experience falling risk premiums and weakening records. In a downside scenario, the lack of trans-
covenants as assets under management rise rapidly and parency of the asset class could lead to a deferred
the pressure to deploy capital increases. realization of losses followed by a spike in defaults.
Immediate risks may seem contained, but the Resulting changes to the modeling assumptions
sector has meaningful vulnerabilities, is opaque to that drive valuations could also cause dramatic
stakeholders, and is growing rapidly under limited markdowns.
prudential oversight. If these trends continue, private • Risks to financial stability may also stem from inter-
credit vulnerabilities may become systemic: connections with other segments of the financial
• Borrowers’ vulnerabilities could generate large, sector. Prime candidates for risk are entities with
unexpected losses in a downturn. Private credit is particularly high exposure to private credit markets,
typically floating rate and caters to relatively small such as insurers influenced by private equity firms
borrowers with high leverage. Such borrowers could and certain groups of pension funds. The assets
face rising financing costs and perform poorly in of private-equity-influenced insurers have grown
a downturn, particularly in a stagflation scenario, significantly in recent years, with these entities
which could generate a surge in defaults and a owning significantly more exposure to less-liquid
corresponding spike in financing costs. investments than other insurers. Data constraints
• These credit losses could create significant capital losses make it challenging for supervisors to evaluate
for some end investors. Some insurance and pension exposures across segments of the financial sector and
companies have significantly expanded their invest- assess potential spillovers.
ments in private credit and other illiquid invest- • Increasing retail participation in private credit
ments. Without better insight into the performance markets raises conduct concerns. Given the specialized
of underlying credits, these firms and their regula- nature of the asset class, the risks involved may
tors could be caught unaware by a dramatic rerating be misrepresented. Retail investors may not fully
of credit risks across the asset class. understand the investment risks or the restrictions
• Although currently low, liquidity risks could rise with on redemptions from an illiquid asset class.
the growth of retail funds. The great majority of
private credit funds poses little maturity transforma-
tion risk, yet the growth of semiliquid funds could Characteristics of Private Credit Borrowers
increase first-mover advantages and run risks. Private credit borrowers tend to be riskier than
• Multiple layers of leverage create interconnectedness their traded counterparts, such as high-yield bond and
concerns. Leverage deployed by private credit funds leveraged-loan issuers. Borrowers in private credit are
is typically limited, but the private credit value chain also relatively vulnerable to interest rates, as loans have
is a complex network that includes leveraged players floating rates. However, the support of private equity
ranging from borrowers to funds to end investors. sponsors and the relatively close and flexible relation-
Funds that use only modest amounts of leverage ship between lender and borrower partially mitigate
may still face significant capital calls in a downside liquidity and solvency risks. Collateralization and the
scenario, with potential transmission to their lever- greater use of covenants provide additional protection
age providers. Such a scenario could also force the for investors.

International Monetary Fund | April 2024 5

 GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

Figure 2.3. Private Credit Firms Are Medium Sized, Technology Sector Heavy, and Relatively Highly Leveraged Compared to
Earnings

The interest rates on private credit loans are Private credit borrowers are smaller than the typical A breakdown of private credit borrowers
typically higher than the yields on leveraged loan or bond issuer, and they are more by sector shows a greater weight of
market-based debt instruments. highly leveraged as compared to their earnings. technology and health care sectors.
1. US Corporate Debt Yields and 2. Size and Leverage Statistics, by Issuer Type 3. Private Credit Sector Allocation, by
Median Private Credit Loan Rates (North America) Last Three-Year Deal Volume
(Percent) (Median debt-to-asset ratio in percent; median (Percent share by global deal volume)
14 debt-to-EBITDA ratio; bubble size reflects median
firm size by total assets) Financial and
insurance services,
12 5.0
Leveraged loans 5.8%
Median firm size: $4.6 billion Telecoms Other,
10 Private credit 4.5 and media, 4.5%
Median firm size: $0.5 billion 6.1%

Debt-to-EBITDA ratio
8 4.0
Raw materials
and natural
6 High-yield bonds 3.5 resources,
Information
Median firm size: $4.5 billion 8.2%
technology,
4 3.0 41%
Industrials,
Investment-grade bonds
2 8.5%
Median firm size: $16 billion 2.5

0 2.0 Consumer
IG HY BDCs 30 40 50 discretionary, Healthcare,
Corporate bonds Leveraged private Debt-to-assets ratio, percent 11.5% 14.5%
loans credit

Sources: Bloomberg Finance L.P.; Preqin; S&P Capital IQ; and IMF staff calculations.
Note: In panel 1, bond yields are based on the aggregate Barclays Bloomberg US corporate bond indices. Leveraged loan yields originate from the LSTA US
Leveraged Loan Index. Private credit loan interest rates are based on BDC filings and reflect the median among a sample of loans. The bond and leveraged loan
yields reflect the marginal cost of funding, whereas private credit loan interest rates reflect the BDC portfolio. The reference date is year-end 2023. In panel 2, private
credit firm fundamentals are based on a sample of private credit transactions from Preqin that have matching data in Capital IQ Pro. This matched sample may
therefore be subject to a selection bias given that most private firms do not publicly release financial statements. BDCs = business development companies;
EBITDA = earnings before interest, tax, depreciation, and amortization; HY = high yield; IG = investment grade.

Reasons Firms Finance in Private Credit Markets confidentiality. More recently, these characteristics
A key reason driving firms to private credit mar- have attracted larger borrowers that have traditionally
kets is challenges in accessing traditional funding accessed other sources of funding. This alternative and
sources. Evidence suggests that weaker firms with low flexible funding source for riskier borrowers involves
or negative earnings and high leverage are less likely a higher cost; as a result, interest rates on private
to secure bank loans and are more inclined to borrow credit loans tend to exceed yields for market-based
from nonbank sources (Chernenko, Erel, and Prilmeier alternatives (Figure 2.3, panel 1).
2022). Private debt fund managers also believe that
they finance companies and leverage levels that banks
would not fund (Block and others 2023). In addition, Characteristics and Vulnerabilities of Private
borrowers in the private credit market may be excluded Credit Borrowers
from the syndicated loan market because of their size Tracking the financial characteristics of private
or their lack of high-quality collateral for bank lenders. credit borrowers is challenging because of their
Private credit can also offer benefits in flexibility, private nature, resulting in limited availability of
speed of execution, and confidentiality. Aspects of their financial statements. To address this challenge,
each transaction, such as the repayment schedule and a sample of private credit borrowers was constructed
collateral requirements, can be tailored to the par- by cross-referencing data from Preqin with corporate
ties involved. Compared with traditional bank loans fundamentals sourced from S&P Capital IQ.
and public debt offerings, private credit transactions Private credit borrowers are typically highly lev-
are often executed more quickly and provide eraged middle-market companies. These firms are

6 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

Figure 2.4. Private Credit Firms Face a Steep Increase in the Cost of Their Variable Rate Debt
The transmission of higher rates into firms’ Payment-in-kind interest payments have Public firms with size and leverage characteristics
cost of debt has been more swift for firms surged for BDC portfolios. similar to private credit firm have shown a
with variable rate debt. deterioration in their ability to pay interest.
1. Cost of Debt by Firm Reliance on 2. BDC Interest Income and PIK Share 3. ICR and Share of Firms with ICR < 1
Variable Rate Instruments (Percent, left scale; total interest income (Percent, left scale; percent, right scale)
(Percent of total debt) indexed to 2018 = 1, right scale)
Private credit Non-PIK (right scale) Interest coverage ratio (left scale)
Variable rate debt PIK (right scale) Share of firms with ICR < 1 (right scale)
75%–100% of total debt PIK share
Variable rate debt 2018 interest income = 1
12 50%–75% of total debt 14 3.5 14 40
Variable rate debt
25%–50% of total debt 12 3 12 35
Variable rate debt
0%–25% of total debt 30
10 2.5 10
9
25
8 2 8
20
6 1.5 6
15
6
4 1 4
10
2 0.5 2 5

3 0 0 0 0
2019 20 21 22 23 2018 19 20 21 22 23

2019:Q4
20:Q1
20:Q2
20:Q3
20:Q4
21:Q1
21:Q2
21:Q3
21:Q4
22:Q1
22:Q2
22:Q3
22:Q4
23:Q1
23:Q2
23:Q3
Sources: BDC 10-K and 10-Q filings; S&P Capital IQ; and IMF staff calculations.
Note: Panel 1 shows the cost of debt, calculated as interest expense divided by total debt. Medians are taken for each bucket of variable rate debt reliance, whereby
this reliance is expressed as the ratio of variable rate debt over total debt. The cost of debt within each bucket varies based on credit fundamentals. Private credit
rates are based on a sample of BDC portfolios. In panel 2, when interest is paid in kind, no cash flow occurs. Instead, the interest coupon is added—usually at an
extra cost—to the loan’s principal. Statistics in panel 3 are based on a sample of public firms located in North America with size and leverage characteristics similar
to those of borrowers in the private credit universe. It should be noted that interest coverage and debt/EBITDA ratios are usually not reflected in firm-level databases
when earnings are negative. This means that the true number of firms with unsustainable interest expense level is (even) higher than indicated by the ICR = 1
threshold. BDC = business development company; EBITDA = earnings before interest, taxes, depreciation, and amortization; ICR = interest coverage ratio;
PIK = payment in kind.

significantly smaller than broadly syndicated loan or sively use floating rate loans. By contrast, only about
high-yield bond-issuing firms. Private credit borrowers 29 percent of high-yield corporate bond issuers’ total
have higher debt-to-earnings ratios but better asset debt is variable rate.6 Panel 1 of Figure 2.4 highlights
coverage than their syndicated loan counterparts. the swifter transmission of interest rates to the
(Figure 2.3, panel 2) For all these asset classes, high cost of debt for firms with a higher share of vari-
debt levels are often driven by private equity sponsors able rate debt.
that enhance returns for their investors by increasing Rising interest rates could ultimately lead
debt on the balance sheets of the firms they acquire to a deterioration in credit quality. The rise in
(Haque 2023). Private credit borrowers operate across benchmark rates has increased the interest burden
various economic sectors and are overrepresented in for private credit borrowers, prompting some
the information technology and health care sectors firms to resort to payment-in-kind interest. This
(Figure 2.3, panel 3).5 flexibility may help borrowers withstand temporary
Private credit borrowers are vulnerable to interest stress, but it can lead to compounding losses if
rate shocks. Private credit borrowers almost exclu- a firm’s underperformance cannot be reversed.

5For comparison, the weights of the technology and health 6For a sample of 518 North American and 157 European

care sectors in the S&P 500 Index are 30 percent and 12 percent, high-yield corporate bond issuers, the average share of variable rate
respectively, whereas these shares are 24 percent and 11 percent for debt is 29.4 percent, at the end of 2022. Sources: S&P Capital IQ;
the Bloomberg World Large and Mid Cap Index. and IMF staff calculations.

International Monetary Fund | April 2024 7

 GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

Figure 2.5. Private-Equity-Sponsored Firms Show Lower Default Rates during Times of Stress, and Overall Credit Losses in
Private Credit Have Historically Not Been Outsized because of Risk Mitigants

Private debt credit losses fall below high-yield Private-equity-sponsored leveraged loans In some sectors and industries, secured loans
bond and bank loan credit losses. have shown significantly lower default rates are less common. This is likely related to the
during periods of stress compared with amount of available collateral.
nonsponsored firms.
1. Average Annual Credit Losses 2. Annual Loan Default Rates 3. Loan Types in Private Credit, by Sector
(Percent) (Percent) (Percent of deals)
1.6 Sponsored 16 70
Software
leveraged loans IT infrastructure
1.4 Nonsponsored 14 60
Health care
leveraged loans Industrial machinery
1.2 12
All 50
1.0 10
40
0.8 8
30
0.6 6
20
0.4 4

0.2 2 10

0 0 0
High-yield Leveraged Private Bank Other years 2009 2020 2023 Secured Mezzanine Unitranche Other
bonds loans credit loans (baseline)

Sources: Cliffwater; Fitch Ratings; Preqin; and IMF staff calculations.

Note: In panel 1, “bank loans” refers to US banks’ commercial and industrial business loans. Average annual credit losses are computed for a 10-year window
between 2013 and 2022. In panel 2, “other years” refers to the 2007–22 period, with the exception of 2009 and 2020. IT = information technology.

The share of payment-in-kind interest in BDC during periods of stress than other firms (Figure 2.5,
interest income has doubled since 2019 (Figure 2.4, panel 2). This strategy may lessen defaults in a
panel 2). In addition, the proportion of firms with short-lived downturn. To help boost recovery rates
unsustainable interest coverage ratios has increased in case of liquidation, most private credit loans are
to over one-third among firms with size and leverage secured, which mitigates credit losses. Collateralization
characteristics similar to those of private credit can be lower in some sectors, such as the software
borrowers (Figure 2.4, panel 3). industry, where unitranche and mezzanine loans are
more common (Figure 2.5, panel 3).

Mitigating Factors of Credit Risk

Despite the risky profile of private credit borrowers, Private Credit Cyclicality
their credit losses have not historically exceeded losses Evidence is mixed regarding the cyclicality of
in high-yield bonds and are comparable to leveraged private credit lending. Private credit managers argue
loans (Figure 2.5, panel 1). Headline default rates for that private credit remains accessible during economic
private credit indices tend to be relatively high, but downturns, whereas traditional funding sources often
these include covenant defaults, which often lead to contract. There is evidence suggesting that private
renegotiated terms rather than a true payment default. credit’s relationship with private equity sponsors facil-
Sponsorship by private equity firms also mitigates itated lending during the COVID-19 pandemic (Jang
private credit risks. Private equity sponsors want to 2024). In March 2020, private credit lending did not
preserve the long-term value of their investments and “dry up,” while high-yield bond and leveraged-loan
may inject additional capital in their portfolio firms issuance contracted strongly (Figure 2.6, panel 1).
if they believe that stress will be transient. Evidence Private credit lending subsequently proved more stable
from the leveraged-loan market illustrates that firms than similarly floating rate leveraged loans. A structural
sponsored by private equity have lower default rates analysis shows private credit market activity is less

8 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

Figure 2.6. Private Credit and Procyclicality

New private credit lending did not show The response of new private credit deals and New BDC lending seems to be more correlated
the same drop as high-yield bond and fundraising to a credit shock is not as consistently with bank lending conditions than private
leveraged-loan issuance in March 2020, negative as the response of leveraged-loan and credit, where fundraising in particular shows a
and also remained more stable in high-yield bond issuance. weaker relationship to bank lending conditions.
subsequent months.
1. Case Study: Gross US Issuance 2. Response of US Issuance to a Credit Risk 3. US Private Credit: New Lending,
during the Pandemic Shock Fundraising, and Bank Lending Conditions
(Percent; cumulative deviation from (Percent; deviation from baseline gross quarterly (Percent; median new lending and fundraising
long term average) issuance volume) as share of outstanding)
100 High-yield bonds 95% CI Point estimate 10 20
BDC lending Private credit Private credit
Leveraged loans
80 fund lending fund
Private credit
fundraising
60 COVID-19
0 15
40
20
0 –10 10
–20
–40
–20 5
–60
–80
–100 –30 0
0 1 2 3 4 5 6 7 8 9 10 Deals Fundraising <0 0–40 40–80 <0 0–40 40–80 <0 0–40 40–80
Months since coronavirus outbreak Private credit Leveraged High-yield Net % of domestic respondents
(1 = March 2020) loans bonds tightening standards

Sources: Bloomberg Finance L.P.; Federal Reserve; PitchBook LCD; Preqin; S&P Capital IQ; and IMF staff calculations.
Note: In panel 1, issuance is benchmarked versus the average cumulative issuance over the same months in the five preceding years. In panel 2, the response of
issuance volumes is based on Structural Vector Autoregression models containing quarterly high-yield corporate bond spreads and issuance volumes, whereby the
identification is based on the Cholesky ordering spreads (first) and issuance (second). The number of lags included is based on the Akaike information criterion. One
lag is included for leveraged loan, high-yield bond issuance and private credit deal volume, two for fundraising. In panels 3 and 4, bank lending conditions are based
on the Net Percent of Domestic Respondents Tightening Standards for Commercial & Industrial Loans for Large/Medium Firms, as reported in the Senior Loan Officer
Opinion Survey on Bank Lending Practices. BDC = business development company; CI = confidence interval.

responsive to a sudden credit shock than the high-yield for investors to redeem their capital. Most private
bond and leveraged-loan markets (Figure 2.6, panel 2). credit fund investors, such as insurance companies
Yet there is also evidence of procyclical behavior. and pension funds, lock in a certain portion of their
The Bank for International Settlements found that investments for a period compatible with the life cycle
capital deployment in private equity and private credit of closed-end funds. However, liquidity stress could
is positively correlated with stock market returns arise from the credit facilities offered by private credit
(Aramonte and Avalos 2021). In addition, data from funds to borrowers. In addition, the recent shift toward
the BDC markets indicate that new private credit loans semiliquid evergreen structures could increase liquidity
contract when banks tighten their lending standards risks over time.
(Figure 2.6, panel 3). New lending by private credit
funds seems to be less procyclical than BDC lending.
Limited Redemptions
Private credit funds invest primarily in private
Liquidity Risks of Private Credit Funds corporate loans, assets characterized by their
Although private credit funds hold highly illiquid illiquidity, and an incipient secondary market. Asset
underlying assets, their structure is designed to managers mitigate the risk of holding these assets by
minimize liquidity and maturity transformation risk setting structures with low maturity transformation.
through long-term lockups and other constraints Private credit CLOs and closed-end funds do not

International Monetary Fund | April 2024 9

GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

typically allow redemptions during their life span. Figure 2.7. Private Credit Liquidity
This significantly reduces the liquidity risks arising
An increase in semiliquid products, such as perpetual business
from such funds.
development companies, can increase liquidity risk.
Redemptions are more common for semiliquid BDCs Assets under Management
structures that aim to provide liquidity to investors (Billions of US dollars)
while investing in illiquid assets. Unlike traditional 300
Traded BDC
closed-end funds, semiliquid funds provide investors Private BDC
250 Perpetual BDC
with limited windows during which they can redeem
their shares. BDCs, for instance, often use semiliquid
200
structures to appeal to a wider investor base, especially
individual investors. Even in semiliquid structures, 150
however, redemptions are often constrained by gates,
fixed redemption periods, and suspension clauses. 100
Although these liquidity management tools may seem
adequate in principle, they have not been tested in a 50
severe runoff scenario, and redemption pressures have
sometimes forced certain large private credit fund 0
2000 02 04 06 08 10 12 14 16 18 20 22
managers to allow redemptions above the established
limits. In addition, certain funds, particularly in Sources: S&P Capital IQ; and IMF staff calculations.
Europe, have adopted more frequent redemption Note: The data comes from the aggregation of 143 business development
companies, 50 of them being traded. BDCs = business development companies.
periods (for instance, monthly or even more often),
which may exacerbate liquidity risks.
Potential liquidity pressures could also arise from
credit and liquidity facilities offered to portfolio Kingdom on the long-term asset funds (LTAFs) may
companies. Private credit funds often combine loans further support this trend.
with revolving facilities. There is a risk that, like the Although designed to enable access for individual
“dash for cash” in 2020, firms simultaneously and investors, the operational efficiencies and liquidity
unexpectedly withdraw their credit balances, sud- potential of semiliquid structures may also appeal
denly increasing private credit funds’ need for cash. to institutional investors. Insurance companies and
Private credit funds might also transfer the liquid- pension funds have transformed their business models
ity stress to end investors through their committed over the years, prompted by the prolonged low
capital (see the “Interconnectedness” section later in interest rate environment. They have shifted from
this chapter). traditional, capital-intensive, long-term guaranteed
products to unit-linked insurance products7 and
from defined-benefit to defined-contribution pension
Risks from the Increasing Share of Retail Investors and plans. By transferring the performance and loss of
Semiliquid Funds investments to end investors (that is, clients), insurers
The recent trend toward the use of semiliquid and pension funds enable clients to switch between
structures has the potential to increase maturity available investment plans. This flexibility reduces
transformation within the private credit industry. the effective duration of the liabilities of insurers and
This trend is exemplified by the active creation of pension funds, potentially increasing their demand
semiliquid funds, such as perpetual nontraded BDCs for liquidity in underlying investments and further
(Figure 2.7). One primary motivation behind this
7Unit-linked insurance products provide both insurance coverage
trend is to access a broader investor pool, particularly
and investment exposures—typically through investment funds—and
individual investors. As institutional investors the insurance benefits are linked to the investment returns. Policy-
reach their limits on investment in private capital, holders are often subject to a minimum lock-in period, additional
funds seek to broaden their capital sources. Recent fees, and taxes for early surrender, which discourage the policyhold-
ers from early surrender and redemption. Despite these constraints,
legislation in Europe on the European long-term insurers often allow policyholders to change their investment alloca-
investment funds (ELTIFs) and in the United tions among the selected investment funds.

10 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

pushing the trend toward semiliquid structures in Figure 2.8. Leverage in Private Credit
private credit.
Investors, funds, and borrowers extensively deploy leverage, forming a
complex multilayers structure.
Multiple Layers of Leverage
Leverage in Private Credit
Equity or credit
Leverage deployed by private credit funds appears Investors investment
(pension funds, insurance 1 Leverage
to be low compared with other lenders such as banks, companies…)
but the presence of multiple layers of hidden lever-
age within the broader private credit system raises
concerns. Leverage may not always be at the fund Private Credit Fund
level, and the entire private credit system can form a 2 Leverage Providers
(banks, syndicates, hedge
complex network involving several potentially lever- funds…)
aged participants, including borrowers. Assessing the Fund-Owned SPV
financial stability implications of these multiple layers
of leverage is challenging because of data limitations.
Portfolio Companies 3

Multiple Layers of Leverage

Sources: IOSCO 2023; and IMF staff.
Private credit investors, funds, and borrowers deploy Note: SPV = special purpose vehicle.
leverage extensively, forming a complex multilayered
structure. Investors such as insurance firms and pension
funds may use leverage (Figure 2.8, channel 1), making a downside scenario of forced deleveraging. In such
them vulnerable to the deterioration of the credit out- scenarios, vulnerabilities among borrowers may lead to
look and an increase in credit downgrades and defaults. large, unexpected losses for funds and end investors.
These investors are also subject to margin and collateral Even funds that deploy modest amounts of leverage may
calls during periods of high market volatility, which, still face significant capital calls, potentially affecting
given their large footprint, may exacerbate stress in their leverage providers. This situation could compel
financial markets (see the “Interconnectedness” section). the entire network to simultaneously reduce exposures,
Private credit investment vehicles may employ lever- spilling over to other markets and the broader economy.
age directly within a fund, through special-purpose Evaluation of leverage in private credit markets from a
vehicles or holding companies (Figure 2.8, channel 2). network perspective by prudential authorities is therefore
Leverage can also be increased through more complex critical but is currently impeded by data constraints.
strategies such as collateralized fund obligations, in
which the interests of the fund’s limited partners are
transferred to a special-purpose vehicle to loosen cash Leverage of Private Credit Funds
flows and access a wider investor base (IOSCO 2023). Private credit funds deploy leverage to enhance
These opaque structures can also include cross-border returns for equity investors. The specific debt structure
entities, which are often used for regulatory and varies by type of investment vehicle (Table 2.2). As for
tax purposes. most nontraded private credit products, information
In addition, private credit borrowers extensively on the deployment of leverage by closed-end funds is
deploy leverage (Figure 2.8, channel 3). As discussed scarce. One of the few in-depth studies of closed-end
earlier in the “Mitigating Factors of Credit Risk” funds was recently conducted by the US Federal
section, most firms borrowing from private credit Reserve using confidential regulatory data.
funds are backed by private equity sponsors, leading According to this study, most closed-end private
to higher debt for the firms or leverage ratios deemed credit funds are unleveraged but some use financial
excessive by banks. and synthetic leverage (Federal Reserve 2023). Those
These multiple layers of leverage throughout the value funds at the 95th percentile have borrowing-to-assets
chain, often hidden by gaps in reporting, could magnify ratios of about 1.27 and derivatives-to-assets ratios
losses and trigger spillovers to other markets during of about 0.66.

International Monetary Fund | April 2024 11

GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

Table 2.2. Characteristics of Leverage in Private Credit Vehicles

Private credit investment vehicles deploy leverage in different forms.
Closed-End Funds BDCs Middle-Market CLOs
Debt-to-equity ratios ~0 to 1.3× ~0.8 to 1.2× All debt-to-equity: ~6×
AAA to other classes: ~1×
Leverage sources Portfolio financing, NAV loans, Secured bank lines of credit and Term leverage through structured
subscription lines, derivatives secured/unsecured bonds notes
Rollover risk Yes Yes No
Collateral call frequency Varies (typically quarterly) Varies (typically quarterly) None (cash-flow structure)
Main lenders Banks, insurers, pension funds Banks, insurers, pension funds Insurers, pension funds, hedge
funds, banks
Total AUM (United States) ~$1.2 trillion ~$300 billion ~$100 billion
Sources: IOSCO 2023; and IMF staff.
Note: AUM = assets under management; BDCs = business development companies; CLOs = collateralized loan obligations; NAV = net asset value.

Sources of debt for BDCs seem more diversified, could create considerable funding needs for the private
as they issue unsecured bonds and notes (Figure 2.9, credit funds. Anecdotal evidence suggests that private
panel 1). BDCs are subject to a regulatory limit on credit funds maintain significant cushions to mitigate
leverage and often establish internal limits that are this risk, yet industry commentary suggests that such
more conservative than the regulatory ones.8 Neverthe- pressures were seen during the height of COVID-19
less, BDCs’ leverage has steadily increased over the past stress in 2020. Unlike banks, private credit providers
20 years (Figure 2.9, panel 2). Anecdotal evidence sug- did not have access to central bank lending facilities,
gests that closed-end funds exhibit the same behavior. nor were central banks able to buy private credit assets
Private credit CLOs use securitization structures that to support asset prices (see the April 2023 Global
enable investors to acquire different tranches based Financial Stability Report). Evaluating the potential
on their risk appetite.9 Insurance companies, pension extent of these risks is challenging given the lack of
funds, hedge funds, and banks are the main investors publicly available information on maturity profiles and
in CLO securities. The ratio of CLO non-equity often even on the composition and amount of debt.
tranches over the equity tranches varies but is often
about 6 to 1.
Although leverage at the fund level appears limited, Private Credit Valuations
private credit funds may still be subject to rollover Private credit loans tend to suffer from stale
risks, particularly in a sharp downturn. Leverage valuations because of the absence of secondary
provided by commercial banks often has loan-to-value markets, limited comparable transactions, and irregular
triggers, and thus, private credit funds may face large appraisals. In a downside scenario, stale valuations
collateral calls on leveraged portfolios during times of could create a first-mover advantage and increase
stress. Leverage providers may decide to mark assets the risk of runs for private credit funds. This risk,
down significantly, given the riskiness of borrowers and however, can be significantly mitigated by restrictions
the lack of comparable public pricing data. In addi- on investors redeeming their investments (see the
tion, private credit funds often provide their borrowing “Limited Redemptions” section earlier in the chapter).
firms with revolvers or other credit lines. Sudden and The lack of information about vulnerable borrowers,
significant correlated drawdowns of these credit lines as discussed in the previous section, combined with
stale valuations, nevertheless makes it challenging for
8The regulation of BDCs caps their debt-to-equity ratio at 2,
outsiders to assess potential losses promptly and could
which was increased from 1 in 2018. Under the framework for loan
fuel a loss of confidence in the segment.
origination funds in the European Union, leverage caps may apply to
private credit fund managers irrespective of whether the underlying
investors are retail.
9Private credit CLOs are structured finance vehicles that pool a Valuation Practices and Requirements
portfolio of privately originated loans and securitize them into debt
securities. They differ from traditional middle-market CLOs that Valuing private credit assets is inherently challenging
include underlying loans not originated in private markets. because of their illiquid nature. Private credit loans

12 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

Figure 2.9. Leverage of Business Development Companies

BDCs have a relatively diversified source of financial leverage that The debt-to-equity ratio of BDCs has increased steadily, although still
includes secured and unsecured bonds and notes. substantially below the regulatory cap of 2.
1. BDCs’ Source of Leverage 2. Median BDC Leverage
(Percent) (Debt-to-equity ratio)
Other Revolving credit (secured bank credit) Interquartile range Median 1.6
Unsecured bonds and notes Secured bonds and notes
1.4
100 4
5 5 5 5
90 11 12
1.2
80 30 37 33
43 39 1.0
70 34 38
60 0.8
50
0.6
40 51
50 51
30 49 39 47 0.4
41
20
0.2
10
9 13 13 9 10 11
0 7 0
2017 18 19 20 21 22 23

2004:Q4
05:Q4
06:Q4
07:Q4
08:Q4
09:Q4
10:Q4
11:Q4
13:Q1
13:Q4
14:Q4
15:Q4
16:Q4
17:Q4
19:Q1
19:Q4
20:Q4
21:Q4
22:Q4
23:Q4
Sources: S&P Capital IQ; and IMF staff calculations.
Note: BDCs = business development companies.

can be tailored to the financing needs of borrowers Private Credit Stale Valuations
and lenders, making it difficult to identify comparable
To assess private credit valuation practices, the
transactions. In the absence of observable price inputs,
analysis conducted for this chapter benchmarked them
the firms must resort to mark-to-model approaches to
against the prices of similar publicly traded assets,
estimate market prices that are inherently subjective
focusing on BDCs. BDCs are specific investment
and can increase the potential for managerial manip-
funds created in the United States to encourage
ulation (Ball 2006; Dudycz and Praźników 2020). To
the flow of capital to smaller companies. BDCs’
address these concerns and mitigate risks, asset manag-
granular reporting of their investment portfolios—
ers frequently seek third-party pricing services.10
consisting of loans, common and preferred equity
Private credit fund managers must adhere to
investments, various tranches of CLOs, and
accounting principles outlined in relevant standards,
asset-backed securities—along with the quarterly
such as generally accepted accounting principles in
position-by-position accounting fair-value marks,
North America or the International Financial Report-
provides a valuable window into the normally opaque
ing Standards. These accounting standards offer guid-
world of private credit.11
ance but do not mandate any specific technique for
asset valuation, granting managers significant discre- 11Most BDCs have portfolios concentrated in first- and

tion. The current regulatory framework, similarly, does second-lien senior secured loans, which typically represent
not specify asset valuation methodologies, focusing on 70 to 90 percent of their investment portfolios. These loans
are distributed across multiple industries and borrowers, often
policy documentation, governance frameworks, and ranging from 100 to 200. In addition to private credit loans, BDC
investor disclosures. Evidence from disclosure forms of portfolios often contain equities and bonds of varying liquidity.
traded private credit funds suggests that markdowns To focus on credit valuations, the analysis excludes price changes
arising from other types of assets. The US Securities and Exchange
often result from impairments of a borrower’s finan-
Commission requires all BDCs to disclose Forms 10-Q and 10-K.
cial position. Public BDCs provide additional transparency, as they cater to a
broad range of equity and bond investors. The disclosure reports of
10Third-party valuation may not fully address the risks, as BDCs are prepared in accordance with the US generally accepted
evidence suggests that profit-driven service providers, appointed accounting principles, following accounting and reporting guidance
and compensated by clients, may prioritize client retention over ASC 946, and fair value of level 3 assets is determined in line
impartiality (Efing and Hau 2015; Short and Toffel 2016). with ASC 820–10.

International Monetary Fund | April 2024 13

 GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

Figure 2.10. Valuation of Private Credit Assets

Adjustment of the valuation of private credit ... which is offset by the additional discount Price and NAV take at least four quarters to
loans is insufficient during market shocks ... of market price to NAV. converge after an unexpected shock.
1. Accounting Fair Value of BDCs’ 2. Public BDCs: Price/NAV 3. Convergence after an Unexpected
First-Lien Loans (Ratio) Downward Shock to the Price-to-NAV Ratio
(Percent) (Percent)
105 1.2 2
1.1
0
100 1.0
0.9 –2

95 0.8
–4
0.7
–6
90 LL market price: 0.6
BB rated 0.5 –8
LL market price: BDCs: weighted-average
85 B rated price-to-NAV 0.4
BDC: accounting Explained by the index of market 95% Cl Price/NAV –10
0.3
price of loans prices of leveraged loans
80 0.2 –12
1 2 3 4 5 6 7 8 9 10
2014:Q1
14:Q4
15:Q3
16:Q2
17:Q1
17:Q4
17:Q3
19:Q2
20:Q1
20:Q4
21:Q3
22:Q2
23:Q1

Dec. 2007
Mar. 09
Jun. 10
Sep. 11
Dec. 12
Mar. 14
Jun. 15
Sep. 16
Dec. 17
Mar. 19
Jun. 20
Sep. 21
Dec. 22
Mar. 24
Sources: 10-Q/10-K disclosures of BDCs; Bloomberg Finance L.P.; S&P Capital IQ; and IMF staff calculations.
Note: Panel 3 shows the impulse response function to a sudden deviation of the price-to-NAV ratio. The impulse response function is based on an AR(1) model using
quarterly data. The panel shows that—based on the historical price-to-NAV ratio patterns—it takes at least four quarters for the price and the NAV to converge after
a shock. The shock is sized to one standard deviation. BDC = business development company; CI = confidence interval; LL = leveraged loan; NAV = net asset value.

The analysis shows that private credit prices move evidence suggests that the discounts are even larger
less than in high-yield and leveraged-loan markets, because of the lack of transparency.
even though private credit borrowers are riskier. In
Figure 2.10, panel 1 shows that the reaction of BDC
loans to credit shocks is much smaller than that of Potential Risks and Benefits from Infrequent Valuations
B-rated leveraged loans, despite the lower credit qual- Stale valuations could offer a first-mover advantage
ity of BDCs’ loan portfolios. The smaller valuation and increase runoff risks for private credit funds, but
adjustment is offset by an additional discount applied this risk appears significantly mitigated at present. In
to market prices of BDC shares (Figure 2.10, panel 2). a downside scenario, stale valuations might overvalue
The discount widens during stress periods, and the a fund’s assets, potentially prompting investors
widening is proxied by the general market repricing of to exit before asset values are marked down. As
credit risk (proxied by the LSTA US Leveraged Loan outlined in the “Vulnerabilities to Liquidity Stress
100 Index). and Spillovers to Public Markets” section, however,
Evidence suggests that adjustments to the values of private credit funds impose substantial obstacles for
private credit loans are smaller and slower than those investors seeking to redeem their investments, thus
observed in public markets. Panel 3 of Figure 2.10 mitigating this risk.
shows that such deviations tend to persist for several Industry commentary suggests that in illiquid asset
quarters, after which share prices and net asset value classes such as private credit, valuations are inherently
per share converge. Markets differentiate BDCs on the uncertain and subjective, potentially diminishing
basis of their qualitative and quantitative characteris- the advantages of more frequent mark-to-market
tics, such as the sector to which each BDC is exposed, practices. Beyond the associated costs and risk of
its ability to grow organically, and its transparency. mispricing, frequent mark-to-market assessments
For other nontraded private credit investment funds, could exacerbate procyclical tendencies and increase

14 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

Figure 2.11. Links between Private Credit and Private Equity

Many firms that manage private credit funds Private-equity-backed firms borrow on the About 70 percent of private credit deals are
also manages private equity funds. leveraged-loan, high-yield bond, and private sponsored by private equity firms.
credit markets.
1. Share of Private Credit Funds Managed 2. New Issue Volume for US Private-Equity- 3. Share of Sponsored and Nonsponsored
by Firms that Also Manage Private Backed Borrowers, 2023 Private Credit Deals, 2021–23
Equity Funds (Percent) (Percent)
(Percent)
High-yield bonds Sponsored Nonsponsored
100 Institutional leveraged loans 100
Direct lending (estimate)
90 23% 90
28%
80 80
13.8% 49%
70 70
60 60
50 50
42.3%
40 81.2% 77% 40
72%
30 30
51%
20 42.3% 20
10 43.9% 10
0 0
Weighted by private Weighted by number Europe North Other
credit assets under of private credit funds America regions
management under management

Sources: PitchBook LCD; Preqin; and IMF staff calculations.

market volatility. Moreover, the emphasis on frequent Interconnectedness

valuations might incentivize investors and managers
Private credit funds have ties with various financial
to prioritize short-term performance, undermining
institutions. These institutions include private equity
the long-term advantage offered by the buy-and-hold
firms, which sponsor most private credit deals; banks,
nature of private credit. Institutional investors are
which are the primary providers of leverage; and insti-
also incentivized to avoid balance sheet volatility and
tutional investors, which invest capital in the form of
demand more frequent and rigorous valuations from
equity and debt investments in private credit funds.
investment managers.
However, stale valuations could also distort
capital allocation, exacerbate conflicts of interest,
and undermine confidence in private credit markets. Interconnections between Private Credit and Private
Inaccurate or infrequent mark-to-market practices Equity Firms
hinder investors from making informed decisions The private credit and private equity industries are
and managing risks effectively. Stale valuations could closely intertwined through two primary channels.
also affect market integrity when incentives are not First, many managers of private credit funds are
aligned. For example, managers may have incentives also managers of private equity funds (Figure 2.11,
to maintain high valuations during fundraising panel 1). This interconnectedness becomes even more
periods to reference historically higher returns. pronounced when considering the size of private
Conflicts of interest also arise from managers’ fees credit funds, given that managers of the largest
based on valuation. Stale valuations make it difficult private credit funds are more likely to be involved in
for stakeholders to assess potential losses in a timely the private equity segment. Second, private credit is
manner and, in a downturn scenario, could fuel a loss a key funding source for firms sponsored by private
of confidence in the segment. equity (Figure 2.11, panel 2), with a large share of

International Monetary Fund | April 2024 15

 GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

Figure 2.12. Exposures of Traditional Financial Institutions to Private Credit Funds

Pension funds and insurers are the main investors in private credit ... and they are rapidly increasing their exposure.
funds globally ...
1. Share of Private Credit Fund Investment 2. Investment in Private Credit Funds by Pension Funds and Insurance Firms
(Percent) (Billions of US dollars, left scale; percent, right scale)
700 4.0
Public pension fund Private sector pension fund Allocation to private credit funds
Insurance company Other (left scale)
600 3.5
Unknown Share of assets under management
(right scale)
3.0
500
19%
2.5
400
35%
2.0
4%
300
1.5
12% 200
1.0
100 0.5

30% 0 0
2016 Current

Sources: Preqin; and IMF staff calculations.

Note: In panel 1, “Unknown” is related to those investors not disclosing the amount of their allocation to private credit funds publicly. This includes pension funds and
insurers that are known to have an allocation to private credit but do not disclose the exact amount. It also includes other investors, family offices, and sovereign
wealth funds, in particular, that do not disclose data on their holdings. In addition to private credit funds, insurers have substantial exposures to private credit through
their investments in structured credit and their participation in direct lending. The share labeled “Other” includes asset managers investment banks, private equity
firms, endowment plans, and more.

the borrowing firms in private credit deals having a Credit risks to banks are also mitigated by the secured
private equity sponsor (Figure 2.11, panel 3). This is nature of the loans. However, the lack of data does not
an important connection because, as discussed in the allow ruling out the possibility that some banks exhibit
“Characteristics of Private Credit Borrowers” section, concentrated exposure to the sector.
private equity sponsors greatly mitigate credit risk. In their search for yield, pension funds and insur-
Overall, these connections suggest that vulnerabilities ance companies have emerged as important end
in one segment of the private financing industry investors in private credit, with significant investment
could spill over to the other. Close ties between the growth in recent years (Figure 2.12, panels 1 and 2).
two industries also raise questions about possible Although private credit exposures are expanding
conflicts of interest, given that managers may have rapidly, they remain relatively small for most institu-
multiple connections through portfolio firms and tions, accounting for only a low single-digit percent-
investors (that is, limited partners). age of total assets under management (Figure 2.12,
panel 2). Certain segments exhibit substantially higher
exposure. Specifically, some large pension funds and
Exposure of Traditional Financial Institutions to selected private-equity-influenced insurers in advanced
Private Credit economies have increased their exposures significantly
Potential risks to financial stability arising from direct in recent years, as investors in not only private credit
exposures of banks to private credit currently appear to funds but also structured credit, participation in direct
be contained. Banks are one of the primary providers lending, and the leverage providers to private credit
of leverage to private credit firms, yet their aggregate investment vehicles.12
exposure remains low. In aggregate, private credit funds
in the United States borrowed about $200 billion from 12For example, such segments have increased their exposure by
US banks at the end of 2021, representing less than investing in collateralized loan obligations and buying bonds and
1 percent of the banks’ assets (Federal Reserve 2023). notes issued by BDCs and other private credit investment vehicles.

16 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

Figure 2.13. Pension Funds with Financial Leverage and Illiquid Investments

The assets of a sample of pension funds with derivatives embedded ... and have significantly increased their share of illiquid investments ...
leverage have risen to more than $7 trillion ...
1. Assets Under Management of Pension Funds with Derivatives 2. Share of Level 3 Assets
Embedded Leverage (Percent)
(Trillions of US dollars)
8 80

Level 3 assets/investable assets: 2022

North America
7 Europe 70
Asia Pacific
6 Average 2016: 31% 60
5 Average 2022: 42% 50
4 40
3 North America 30
Europe
2 Asia Pacific 20
1 Average 10
0 0
2011 2016 2022 0 20 40 60 80
Level 3 assets/investable assets: 2016

... with private debt accounting for a significant share of the increase ... while their financial leverage also increased during the same period.
since 2016 ...
3. Private Credit Share of Level 3 Assets for Selected Pension Funds 4. Financial Leverage of Selected Pension Funds
with Embedded Derivatives Leverage (Percent)
(Percent)
40 2022: 362 300
Average Top 10 percent
35 Bottom 10 percent IQR

Derivatives/total assets: 2022

250
30 2016:
Almost half of the increase in 417 200
25 average level 3 assets can be
20 accounted for the rise in the Average 2016: 67% 150
allocation to private credit Average 2022: 80%
15 since 2016 North America
Europe 100
10 Asia Pacific
Average 50
5
0 0
2016 2022 0 50 100 150 200 250 300
Derivatives/total assets: 2016

Sources: Bloomberg Finance L.P.; individual annual reports of selected pension funds; Preqin; and IMF staff calculations.
Note: The calculation in panel 1 is based on a sample of 26 large pension funds in 10 jurisdictions that disclose data on the gross notional exposure of derivatives in
their annual reports. These 26 funds are among the largest 150 pension funds worldwide and have combined assets under management of more than $7 trillion,
which is about 17.5 percent of global pension fund assets. Note that the calculation in panel 3 is based on 21 of the pension funds in the sample for which data on
allocation to private credit funds was found in Preqin. This calculation excludes other types of private credit investment, including direct lending or investment in
structured private credit vehicles such as collateralized loan obligations. Panel 4 uses the gross notional exposure of derivatives as a proxy for the financial leverage
of pension funds. These funds can be also active users of repurchase agreements, which can further increase their financial leverage. IQR = interquartile range.

Vulnerabilities to Liquidity Stress and Spillovers to (Figure 2.13, panels 1 and 2).13 Rising allocations
Public Markets to private credit are estimated to account for almost
half of the increase in level 3 assets, reflecting
Private credit is increasing the share of illiquid
assets held by pension funds and insurers, giving
rise to concerns about potential market disruptions. 13The sample consists of 26 large pension funds—ranked among

Some of the world’s largest pension funds, with assets the largest 150 pension funds in assets globally—that disclose data
exceeding $7 trillion, have significantly increased on the gross notional exposure of derivatives in their annual reports.
These funds have combined assets under management of more
their allocation to illiquid investments while actively than $7 trillion, which is about 17.5 percent of global pension
using derivatives and other forms of leverage fund assets.

International Monetary Fund | April 2024 17

 GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

Figure 2.14. Private-Equity-Influenced Life Insurers

The assets of private-equity-influenced insurers ... have much larger illiquid exposures than ... and their capital adequacy is weaker than
have grown sharply ... the median large insurer globally ... the median US insurance firm.
1. Assets of US Private-Equity-Influenced 2. Share of Level 3 Assets 3. Risk-Based Capital Ratios
Life Insurers (Percent) (Percent)
(Billions of US dollars, left scale; percent,
90th percentile Median 90th percentile Median
right scale)
10th percentile 10th percentile
1,500 18 70 600
Total assets under management
1,300 Share of US life insurance 16
industry assets 60
1,100 (percent, right scale) 14 500
50
12
900
10 40
700 400
8 30
500
6
20
300 300
4
100 10
2
–100 0 0 200
Private-equity- Global insurers US private-equity- US insurers
2011
12
13
14
15
16
17
18
19
20
21
23 est.

influenced insurers influenced insurers

Sources: A.M. Best; individual annual reports of selected private-equity-influenced life insurers; S&P Capital IQ; websites of individual private-equity-influenced life
insurers; and IMF staff calculations.
Note: The 2023 estimate in panel 1 is calculated using information from the websites of 28 individual US private-equity-influenced life insurers. The global insurers
estimate in panel 2 is calculated from a sample of 50 selected large insurance groups from 19 jurisdictions across Europe, North America, Asia, and Australia. The
sample of large insurers has assets of more than $15 trillion, or about 40 percent of all insurance assets globally. The calculation for private-equity-influenced life
insurers is based on a sample of 15 entities for which Level 3 asset information was found in their annual reports. Panel 3 includes 16 US private-equity-influenced
life insurers for which risk-based capital ratios were found. The US insurers’ risk-capital ratio is based on a sample of the largest 20 US insurers. This calculation
was possible only for the United States, as its risk-based capital ratios are not directly comparable with other jurisdictions. est. = estimation.

the growing popularity of this asset class among illiquid exposures.14 Their assets have risen sharply in
institutional investors (Figure 2.13, panel 3). Pension recent years, with US private-equity-influenced life
funds, moreover, have sizeable investments in private insurers managing well more than $1 trillion, over
equity, which are also illiquid and can be related 15 percent of all US life insurance assets (Figure 2.14,
to the same private credit investments the funds panel 1). Insurance companies can provide private
hold (see the previous section). This change in asset equity firms with a stable supply of premiums that
composition heightens pension funds’ vulnerability can be invested in private credit, structured credit, real
to margin and collateral calls that could arise from estate, and infrastructure funds arranged and controlled
their derivative exposures. These calls may exacerbate by the private equity firms themselves (Cortes, Diaby,
stress in global financial markets, particularly markets and Windsor 2023). Private-equity-influenced life
in which pension funds have a large footprint, such insurers appear to have more exposure to less-liquid
as government bonds, equities, and corporate bonds. investments than other insurers (Figure 2.14, panel 2).
The financial leverage of those pension funds rose Their median exposure to level 3 assets is currently
to 80 percent of assets in 2022 from 67 percent 20 percent of assets, compared with 6 percent for a
in 2016. Panel 4 of Figure 2.13 shows outliers sample of the largest 50 insurers globally. Most of
with significantly higher-than-average metrics. their illiquid exposure is invested in structured credit
Pension funds can also actively engage in repurchase
14Private-equity-influenced life insurers are those that were
agreements, further increasing their financial leverage.
acquired (fully or partly) by private equity firms, with the latter
Private-equity-influenced life insurers, which exercising decisive influence in the management of their assets and
constitute a fast-growing sector, have also elevated their liabilities. See Cortes, Diaby, and Windsor (2023) for further details.

18 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

(36 percent) and direct credit lending (23 percent).15 funds allow clients to switch frequently between
Despite greater exposure to illiquid investments, their available investment funds. For example, Australian
solvency capital ratios appear to be weaker than the superannuation funds are required to allow clients to
average (Figure 2.14, panel 3). This means that their switch between different investment options, generally
regulatory capital could be eroded much faster in a within three business days. Private credit investments
scenario of rapid increases in corporate defaults; the are widely available among superannuation members,
severity of such a scenario potentially aggravated by the and even default funds include a small percentage of
embedded leverage in structured credit investments, private credit investment. Recent pension reforms in the
such as CLOs and other asset-backed securities, which United Kingdom follow a similar pattern,17 encouraging
constitute a significant part of their illiquid exposures. defined-contribution pension funds and unit-linked
Different regulatory frameworks in the insurance products to allocate their investments into illiquid assets,
sector have incentivized life insurers to reinsure their including private credit loans. This change will require
portfolios with offshore reinsurers, which often invest fund managers to consider the interaction between the
in more illiquid assets. Life insurers influenced by long-term commitment necessary for investments in
private equity have established offshore reinsurers, private credit funds and the ability of their clients to
primarily in Bermuda. A significant regulatory dif- switch between available investment funds. This could
ference between Bermuda and the life insurers’ home create redemption pressures in the private credit industry.
jurisdictions lies in the discount rates applied when
valuing reinsurance liabilities. The discount rates tend
to be higher than international best practices would Competition with Banks and Deterioration of
dictate, thereby resulting in potentially higher solvency Underwriting Standards
ratios. These private-equity-influenced reinsurers have Private credit has expanded rapidly in recent years,
expanded their assets to over a $1 trillion, constituting intensifying competition with banks in the syndi-
about 4 percent of total life insurance assets globally cated loan markets. While most deals still focus on
(Cortes, Diaby, and Windsor 2023). middle-market firms, private credit funds in the
Pension funds and insurance companies can also United States and Europe now provide loans to much
face liquidity pressures arising from capital calls by larger corporate borrowers, previously funded in the
private credit funds. These funds may require investors broadly syndicated loan market or corporate bond
to provide capital within days, and investors have market. Recently against a backdrop of easy financial
limited control over the timing of these calls. The conditions and increased risk appetite as investors
Federal Reserve (2023) estimates that, as of the end of anticipate central banks to lower rates, private credit
2021, US pension funds had $69 billion in uncalled funds have both faced renewed competition from
capital commitments, and insurers had $23 billion. banks for larger deals. In some cases, private credit
The total amount of uncalled capital (or “dry powder”) funds have also partnered up with banks and other
suggests that insurers and pension funds might institutional investors to finance such deals. Industry
have commitments even higher than their existing commentary suggests that underwriting standards and
allocations to private credit funds. covenants have already deteriorated in this segment
The increased share of investment in private credit of the market.
might also create tensions related to the shift of insurers This deterioration in pricing and nonpricing
and pension funds toward defined-contribution terms requires careful monitoring. In the event of an
products.16 Because final clients bear the performance
and loss of the investments, insurers and pension
17See Chancellor of the UK Exchequer Jeremy Hunt’s Mansion

House speech in July 2023, when he stated, “Defined contribution

15The composition of investment is estimated from a reduced pension schemes [DC] in the UK now invest under 1 percent in
sample of selected private-equity-influenced life insurers that report a unlisted equity, compared to between 5 and 6 percent in Australia
breakdown of their level 3 assets in their annual reports. . . . The [Mansion House] Compact—which is a great personal
16For example, the share of unit-linked products of European triumph for the Lord Mayor—commits these DC funds, which
insurers rose to 24 percent in June 2023 from 18 percent at the end represent around two-thirds of the UK’s entire DC workplace
of 2017. Sources: European Insurance and Occupational Pensions market, to the objective of allocating at least 5 percent of their
Authority and IMF staff calculations. default funds to unlisted equities by 2030” (Hunt 2023).

International Monetary Fund | April 2024 19

GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

economic downturn, a sharp rise of defaults could to understand potential vulnerabilities and spillovers
result in significant losses for bank and nonbank to other asset classes or systemic institutions. As later
lenders, especially if credit risk is not properly priced described, there are cross-border and cross-sectoral
when credit is extended. risks. Relevant regulators and supervisors should coor-
dinate to address data gaps and enhance their reporting
requirements to monitor emerging risks.
Policy Recommendations
Given the potential risk private credit poses to
financial stability, authorities could consider a more Credit Risks
proactive supervisory and regulatory approach to this The current regulatory requirements for insurers and
fast-growing, interconnected asset class. Regulation and pension funds do not consider the credit performance
supervision of private funds was strengthened signifi- of underlying loans. Prudential requirements are
cantly after the global financial crisis. Yet, the rapid often determined by the legal form and rating of the
growth and structural shift of borrowing to private instrument, without considering the performance of
credit requires that countries undertake a further com- the underlying loan portfolio. These limited regulatory
prehensive review of the regulatory requirements and requirements, coupled with limited supervisory scru-
supervisory practices where the private credit market or tiny, allow insurers and pension funds to rely heavily
exposures to private credit are becoming material. on valuations by investment managers and ratings by
Several jurisdictions have already undertaken rating agencies. Moreover, the multiple layers of lever-
initiatives to enhance their regulatory framework age make it harder for end investors to monitor under-
in order to more comprehensively address potential lying loan performance and the quality of collateral.
systemic risks and challenges related to investor Supervisors of insurers and pension funds with high
protection. The US Securities and Exchange exposure to private credit should enhance their mon-
Commission (SEC) is making substantial efforts to itoring of aggregate portfolio risks in private credit.
enhance regulatory requirements for private funds, Given that loan portfolio supervision is central to bank
including enhancing their reporting requirements. oversight, insurance and pension supervisors should
The European Union has recently amended the adopt some banking supervisory practices regarding
Alternative Investment Fund Managers Directive— credit risk. These supervisors should strengthen their
commonly referred to as AIFMD II—to include assessments and corresponding prudential require-
enhanced reporting, risk management, and liquidity ments of the credit exposures through both structured
risk management. AIFMD II has additional specific products and direct lending. In addition, supervisors
requirements for managers of loan origination funds of private credit funds should also closely monitor
with respect to leverage caps (175 percent for open-end their underwriting practices and credit risks, particu-
and 300 percent for closed-end funds) and design (a larly from their potential to exacerbate systemic risks
preference for closed-end structures and additional through transformation into liquidity, leverage, and
requirements for open-end funds), among others. interconnectedness risks.
Regulatory authorities in other countries (such as
China, India, and the United Kingdom) have also
enhanced the regulation and supervision of private Liquidity Risks
funds. With the growth of the private funds sector Liquidity mismatch risks in most private credit
in general, supervisors have also increased scrutiny funds appear minimal, yet the growth of semiliquid
over various aspects of private funds, particularly on structures raises concerns. Although securities reg-
conflicts, conduct, valuation, and disclosures. ulators have introduced requirements for liquidity
To address data gaps and enable the accurate, com- management tools to reduce liquidity mismatch risks,
prehensive, and timely monitoring of emerging risks, many countries still permit open-end structures and
the relevant authorities should enhance their reporting frequent redemptions (sometimes even daily) for
requirements and supervisory cooperation on both private credit funds that invest in highly illiquid assets.
cross-sectoral and cross-border bases. Although the pri- This permits existence of structures with a high poten-
vate nature of private credit remains crucial to market tial of liquidity mismatch, and the mitigating tools
functioning, regulators need access to appropriate data used by semiliquid funds have not been tested by a sys-

20 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

temic event. The “retailization” trend, moreover, means Regulators should fill data gaps by enhancing
that individual investors new to the sector who do not comprehensive reporting of leverage across the value
fully understand the liquidity features may become chain, with close cooperation domestically and
significant investors, potentially creating herd behavior internationally. Insurance and pension supervisors
toward redemption during stress episodes. should address excessive risk taking by adjusting
Securities regulators should adopt the recent rec- prudential requirements under the principle of “same
ommendations of the Financial Stability Board and activity, same risk, same regulation.” In the event that
International Organization of Securities Commissions such monitoring finds excessive leverage that may
(IOSCO), particularly regarding product design and have systemic implications, securities regulators should
liquidity management tools. In line with Financial consider suitable regulatory tools such as leverage caps.
Stability Board recommendations, private credit funds
should create and redeem shares at lower frequency
than daily or require long notice or settlement periods, Asset Valuation Risks
and the relevant authorities should consider requiring Regulatory requirements for private credit funds
that such funds be closed-end. Regulators should also currently focus on policy documentation, governance,
consider stringent requirements to ensure private credit and investor disclosures but do not specify how assets
firms use liquidity management tools and stress testing should be valued. The overall regulatory framework
when product design permits significant liquidity for private funds tends to have a light touch, includ-
mismatch. Securities market regulators should also ing on valuation, because the institutional investors
ensure that, in funds that permit retail participation, are sophisticated, the primary expectation being that
regulatory requirements include comprehensive and investors have the capacity and incentive to seek
clear disclosures on potential risks and redemption relevant information from asset managers and adjust
limitations. their own valuations. Unlike other aspects of a private
credit fund, however, the main investors (insurance
companies and pension funds) may not have incentive
Leverage Risks to challenge fund managers’ valuations because they
Current reporting requirements are insufficient and desire to maintain the stability of their investments.
prevent a comprehensive assessment of the leverage The managers’ significant discretion also results in
used in private credit. At present, the potential trans- wide variation in valuation for the same asset across
mission of funding shortfalls from leverage provid- funds and entities. An IOSCO survey also found
ers cannot be fully evaluated. Fund-level reporting that the approach to valuation varies significantly by
requirements to securities, insurance, or pension fund country. IOSCO’s agreement with the International
supervisors may not capture the complex and multi- Valuation Standards Council to identify potential
layered sources of leverage, including the subscription approaches to enhance the quality of valuations is
lines and leverages special-purpose vehicles or feeder welcome in this context.18
funds deploy. Reporting is also fragmented across bor- Supervisors should closely monitor the valuation
ders and sectors. These data gaps, along with the lack approaches and procedures of private credit funds,
of a comprehensive overview, prevent supervisors from insurers, and pension funds and in case of heightened
monitoring leverage at the macro level. valuation risks, strengthen regulation on valuation
When banks or other supervised institutions provide independency, governance, and frequency. To
private credit firms with leverage, regulators should address these concerns, some regulators have already
enhance risk management practices regarding potential strengthened regulation concerning independent audits
funding needs. This will likely require that the private (for example, the US SEC) and intensified supervision
credit funds borrowing from supervised institutions (for example, US SEC, UK Financial Conduct
engage in some thematic reviews of liquidity manage- Authority, European Securities and Markets Authority)
ment practices. Such exercises should incorporate stress relating to valuation of private funds. Supervisors
scenarios featuring tightening of funding availability,
18See the recent statement of cooperation between the IOSCO
markdowns of levered portfolios, and sudden and sig-
and the International Valuation Standards Council (“IOSCO IVSC
nificant drawdowns of credit facilities by private credit Statement of Cooperation,” October 18, 2022, https://​www​.iosco​
funds’ corporate borrowers. .org/​library/​pubdocs/​pdf/​IOSCOPD716​.pdf ).

International Monetary Fund | April 2024 21

GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

should continue to thoroughly assess valuation If regulatory arbitrage across sectors and borders per-
governance and controls through intrusive supervision, sists, and if it leads to excessive concentration, relevant
including on-site inspection, on the valuation practices regulators should coordinate efforts to address such
of private credit funds.19 Improper or fraudulent arbitrage by ensuring more consistent risk assessments
valuation should be followed by timely and strict and corresponding prudential treatments.20
actions, including enforcement. Proper and timely
loss recognition will become even more important
for private credit funds with semiliquid structures Conduct Risks
and funds after expiration of lock-up periods. If such Increasing retail participation in private credit mar-
supervisory efforts indicate heightened valuation risks, kets raises concerns about conduct risks that requires
regulators should consider mandating independent close supervision by conduct supervisors. The regula-
external valuations and audits while strengthening the tory framework has so far assumed that investors are
managers’ internal governance mechanisms on valuation sophisticated and has applied a light touch to investor
procedures. Regulators may also consider increasing the protection safeguards.21 Although existing regula-
frequency of external valuations and audits, if necessary. tory requirements cover conflicts of interest in detail,
conduct risks will increase if the investor mix moves
toward more retail participation, considering that more
Interconnectedness Risks frequent redemptions may exacerbate conduct concerns
Risk taking is concentrated in some jurisdictions regarding valuations and follow-on investments.22
and subsectors (Cortes, Diaby, and Windsor 2023). Conduct supervisors should closely monitor conduct
Differences in regulatory requirements across sectors risks and enhance disclosure requirements, particularly
might have encouraged insurance companies, in partic- relating to conflicts of interest. Regulatory require-
ular those influenced by private equities, and pension ments for conduct with retail investors should be strin-
funds to hold excessive exposure to private credit. gent. Supervisors should monitor private credit funds’
Banks continue to provide leverage to the private funds distribution channels and marketing practices, and
and their affiliates. If the trend continues, excessive tailor suitability tests to prevent mis-selling.23 Conduct
concentration in private credits and interconnectedness supervisors should ensure that retail investors (includ-
among private equity firms, insurance companies, and ing holders of unit-linked products and defined-benefit
pension funds could exacerbate systemic risks. Data plans) fully understand the higher credit and liquidity
gaps often hinder the monitoring of concentration and risk of private credit investments and their limitations
interconnectedness risks. on redemptions. Supervisors should also continue to
Supervisors should fill data gaps and cooperate with monitor potential conflicts of interest in sponsored
each other, including across borders, to ensure effective deals involving affiliated private debt and private
monitoring of interconnectedness risks. The authority equity managers, particularly given that privately
in charge of systemic risk monitoring should lead in negotiated transactions lack market pricing.
analyzing overall trends in private credit markets and
assessing potential contagion risks to the financial 20Consistent risk assessment does not necessarily mean applying

system. All sector regulators should actively coordinate identical capital requirements but rather undertaking holistic assess-
to address data gaps and gain a better understanding ment of the various risks end investors face on a subject exposure.
21Separate regulatory frameworks for certain types of
of interconnectedness risks. Cross-border cooperation retail-oriented private credit vehicles (for example, BDCs) provide
assumes importance where cross-border interconnec- stringent requirements for leverage caps, redemption and liquidity
tions are significant and concentrated. International risk requirements, investor disclosures, and reporting, among others.
22IOSCO (2023) discusses manager-led secondary markets and
bodies, such as the Financial Stability Board and
continuous funds as examples where conflicts of interest could arise.
IOSCO, can aid in improving data gaps globally. 23According to IOSCO (2023, p. 37), “Wealth barriers to accred-

ited investor status . . . have also lessened as a mechanical function

19US SEC (2024) and the UK Financial Conduct Authority of inflation. . . . Some funds are also experimenting with innovative
(2023) are reviewing valuations in private markets. ways to reduce distribution costs.”

22 International Monetary Fund | April 2024

 CHAPTER 2 The Rise and Risks of Private Credit

Box 2.1. Small But Growing Private Credit Funds in Asia

Private credit is experiencing robust growth in experiencing modest growth tend to have small or
Asia (Figure 2.1.1, panel 1). An increasing number nonexistent private credit markets. China, India, and
of mature companies are seeking funding for acqui- Indonesia are emerging as key examples, whereas
sitions and diversification of their creditor base, Australia and New Zealand have more mature markets
while long-term investors, such as pension funds and with active participation from superannuation funds.
wealth managers, are drawn to potentially attractive Many credit funds have investment teams based in
yields. In recent years, several international alternative Hong Kong SAR and Singapore. Private credit in
asset managers have launched Asia-focused funds. A Korea has also grown steadily.
recent industry survey showed that many institutional Unlike in the United States, where the private
investors in the region intend to increase allocations to credit market acquired the ability to finance
private credit.1 relatively large transactions, Asia’s market primarily
Despite growth, Asia’s private credit market remains fills the gaps banks leave. In this context, private
relatively small, totaling about $93 billion and credit funds focus on acquisition financing,
accounting for about 5 percent of the global total. asset-light businesses, and distressed debt, providing
Most investors are local and focus on smaller deals. financing to the high-yield segment, which remains
Global allocation to private credit in Asia remains underdeveloped in many emerging markets and
limited (0 to 5 percent of assets under management) developing economies in the region (Figure 2.1.1,
and is relatively less appealing because of tighter panel 2). The Asian market remains fragmented, as
spreads and high foreign exchange hedging costs. the regional portfolios are complicated by differences
Regions with highly liquid banking systems or those in currencies, regulatory environments, and investor
protection regimes.
Most funds are closed-end structures of 6 to 8 years
This box was prepared by Natalia Novikova.
1BlackRock’s 2023 Global Private Markets Survey (https://​ for performing credit and up to 10 years for distressed
www​.blackrock​.com/​hk/​en/​institutional​-investors/​insights/​global​ assets. Covenants tend to be tighter in emerging
-private​-markets​-survey). market Asia, given weaknesses in investor protection.

Figure 2.1.1. Private Credit in Asia

Asia’s private credit market is growing rapidly ... ... with about half of the capital raised for special
situations, although direct lending is gaining share.
1. Asian Private Credit Asset under Management 2. Shares of Market Segments in Asian Private Credit
(Billions of US dollars) (Percent)
100
Australia Venture debt Direct lending Mezzanine
90 China Special situations and distressed debt
Hong Kong SAR 100
80 India 90
70 Singapore
Other 80
60 70
50 60
40 50
40
30
30
20
20
10 10
0 0
2001 03 05 07 09 11 13 15 17 19 21 June 2014 15 16 17 18 19 20 21 22 June
23 23

Sources: Preqin; and IMF staff calculations.

International Monetary Fund | April 2024 23

GLOBAL FINANCIAL STABILITY REPORT: The Last Mile: Financial Vulnerabilities and Risks

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24 International Monetary Fund | April 2024