The Role of Private Credit in U.S. Capital Markets

Following the 2008 global financial crisis, many banks “de-risked” and, as a result, decreased lending to many small and mid-size companies. In response, the growth of lending by private credit funds began to accelerate and, in doing so, filled a significant gap in the U.S. credit market. This “private credit”, in turn, has helped facilitate the growth of the companies that serve as the backbone of the U.S. economy.

In this white paper, we discuss how the growth of private credit funds has benefitted the U.S. economy by providing a crucial, alternative source of lending to companies, and does so in a way that does not pose significant financial stability concerns. Among other things, the paper highlights that:

• The U.S. Government Accountability Office’s (“GAO”) recent report regarding leveraged lending confirmed that U.S. financial regulatory agencies have not found leveraged lending to significantly threaten financial stability (although they continue to monitor its risks).
• Even though private credit is not leverage constrained, the evidence shows that private credit lending practices are appropriate and that debt structure, documentation, and underwriting are robust and adequately protective of lenders. These factors have resulted in generally limited default rates for private credit. In addition, business development companies (“BDCs”)—another source of credit for middle-market companies—are subject to significant regulation and disclosure requirements.
• Closed-end private credit funds do not pose financial stability risks because the funding is locked in with no daily redemptions (there is no risk of “runs” leading to asset fire sales) and the funds and managers are engaged in a limited set of financial activities, are not significantly interconnected with other financial institutions, and are highly diversified so there is little risk of default or contagion from losses.

In light of these findings, this white paper concludes that private credit is distinguishable and poses no significant threat to financial stability, and provides an overall stabilizing effect on the U.S. economy.