(Bloomberg) -- Risks are building inside the $1.6 trillion private credit market and regulators aren’t doing enough, according to two Pimco executives.
Private credit — which has fast become a Wall Street favorite and is attracting cash from hedge funds, sovereign wealth funds, insurers and pension providers as well as private equity firms — poses a risk to investors because it’s under-regulated and lacks transparency, according to Jamie Weinstein, who helps lead Pimco’s $170 billion alternative-investment business and Christian Stracke, Pimco’s president and the global head of the credit research group.
The market started life by providing finance to private equity businesses and rapidly grew in the wake of the global financial crisis as banks facing increasing regulation pulled back from lending. Since 2015, it has roughly tripled in size, growing to encompass traditional direct lending to smaller companies, buyout financing as well as real estate and infrastructure debt.
“There’s been an evolution into private markets; before the global financial crisis the risk was inside the banks, now it’s outside,” Weinstein said in an interview. “There’s been this big transfer of risk to investors. The question is when will the regulators start looking.”
Supporters say the asset class shields investors from the volatility of mark-to-market losses in public markets. But for Stracke, the flood of money pouring into the sector is worrying because it’s channeling into debt funds that aren’t transparent.
“It’s staggering when you look at what happened since the global financial crisis and how much more leverage there is in the system,” said Stracke. The question is who owns the debt and is it in safe hands?”
Calls for the market to be more heavily regulated are growing and the dangers of investors not being able to exit their positions in private debt has been highlighted by watchdogs such as the European Union. The majority of investment managers at pension funds, insurance companies, family offices and wealth managers surveyed by Aeon Investments said they planned to increase allocations to private credit in the next year, Bloomberg reported.
Private credit has become a new high-yield bond and leveraged loan market, Stracke said, adding that debt-to-earnings at middle market companies has risen to 5.4 times from 4.3 times at the beginning of the crisis in 2008.
“Defaults so far are low for now but if we keep rates where they are there will be real stress across the higher risk parts of the market,” Weinstein said.
Pacific Investment Management Co. has been positioning itself to profit from any meltdown in private lending, real estate or other alternative assets, as it looks to juice returns from non-traditional lending. The firm expanded its so-called capital solutions business to lend more to businesses struggling to raise funds amid high borrowing costs, Bloomberg reported in September.
The strategy build-out is an extension to private credit and offers equity as well as debt in complex deals across the senior and junior parts of the borrower’s capital structures. The firm has hired 50% more portfolio managers focused on private strategies since 2020.
- Banks and direct lending funds are competing to fund the potential buyout of Consilium Safety Group AB
- Direct lending funds are working on plans to provide private debt of about $300 million to back a potential sale of patent software company Anaqua Inc.
- A Blackstone Inc. and Permira-led consortium are aiming for private credit financing for their potential buyout of online classifieds company Adevinta due to the weak state of the European leveraged loan market
- Silver Point Finance led a roughly $500 million private credit loan to refinance existing debt of hand sanitizer maker GOJO Industries Inc.
- Whitehaven Coal has launched refinancing of a $900 million bridge loan for its acquisition of two coking mines from BHP, targeting banks and credit funds
- JPW Industries Inc., a maker of industrial tools and equipment, is in advanced conversations with direct lenders to get a new term loan of around $300 million to refinance bonds due next year
- Real Madrid FC is set to borrow about €370 million from institutional investors to help finance the renovation of its iconic Santiago Bernabeu stadium
- German engineering firm Robert Bosch Gmbh is looking to raise at least $750 million through a privately-placed bond sale
More on Private Credit Deals
- Brookfield Asset Management closed its third global infrastructure debt fund after receiving more than $6 billion in investor commitments
- Charlesbank Capital Partners is aiming to raise $1.25 billion for its third opportunistic credit fund
- Private credit funds raised $38.8 billion globally in the third quarter, a 43% drop from the previous three months
- Australia’s biggest pension funds are hunting for more private credit deals as the investments offer a key hedge against inflationary pressures and higher interest rates
- Ares Management Corp. raised $6.6 billion for its second asset-based credit fund, as it seeks to snap up portfolios from banks that want to sell them to comply with higher capital requirements
- AGL Credit Management has hired David Richman as a managing director in its private credit team led by Taylor Boswell
Did You Miss?
- Apollo, Ares Lead Private Credit Fund Push Into India Property
- JPMorgan Is Said to Seek Out Partner for Private Credit Push
- Chief of $55 Billion Texas Fund Is Wary of Private Debt Market
- Apollo Shares Jump Most in Three Years on Private Credit Growth
- KKR Says Asset-Based Debt Among Top Private Credit Opportunities