Global financial regulators are increasingly concerned about the valuation of private credit, potential concealment of troubled loans, and the significant interconnection between private markets and insurance funds. Andrew Dean, co-chief of the US SEC’s Division of Enforcement Asset Management, highlighted these issues at a Bloomberg regulatory forum in New York.
Joining Dean were regulators from the European Central Bank (ECB) and the International Monetary Fund (IMF), who echoed the importance of scrutinizing portfolio valuations and flagged the risks associated with liquidity mismatches and potential redemptions in the burgeoning $1.7 trillion private credit market. Critics, including the ECB, are delving deeper into how banks, private equity, and insurers are intertwined with private credit markets, with transparency being a central concern.
Elizabeth McCaul of the ECB’s Supervisory Board pointed to systemic risk as a focal concern, particularly with increasing borrower reliance on payment-in-kind loans, which indicate leveraging issues. Dean underscored the potential for systemic risk by referencing Credit Suisse’s financial hit following the Archegos Capital Management debacle.
Charles Cohen, an IMF advisor, stressed the need to understand better the link between private credit and insurance, particularly as insurers funnel more capital into illiquid assets. Dean described private credit deals as “illiquid level-three assets,” emphasizing their complexity and the necessity for enhanced transparency and stress-testing.
Drawing from Taylor Swift’s lyrics, Dean remarked, “Nothing lasts forever but things are getting good now,” suggesting the current appeal of private markets hinges on sustaining risk-adjusted returns. The call for transparency in private credit remains crucial, with regulators advocating for measures to safeguard financial stability.
Original Story https://www.livemint.com/news/top-regulators-call-out-valuation-risks-in-private-credit-11729637694940.html
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