Current challenges and investor redemptions in private credit are unlikely to materially disrupt the financial system or the broader economy, according to an analysis by S&P Global.
“Despite private credit’s limited liquidity and transparency, we think exposure remains manageable for systemically important participants, such as banks and insurers,” the credit rating agency said.
The current size of the private credit market, estimated at between $1.8tn (£1.3tn) and $3tn, only represents a small piece of global financial markets, argues S&P, given global nonfinancial corporate debt is estimated at $100.6tn and global bank assets at $190tn.
While recent investor redemptions and the rise of AI are putting private credit under fresh scrutiny, S&P notes systemically important banks and insurers have limited and “generally well-managed” exposure to private credit.
However, S&P also points out that the potential for systemic risk is rising due to increasing interconnections between market participants, more complex assets and structures that introduce new leverage into the system, and the rising use of semi-liquid investment vehicles.
The longer redemptions remain elevated, the more likely portfolios of business development companies, especially in the software sector, will be under pressure, says S&P, as managers sell more liquid assets to meet liquidity needs.
For systemic risk to materialise in private credit, stress in one part of the market would need to spill over into other parts, resulting in serious negative effects on the financial system and real economy, S&P notes.
It is possible for risks or losses to spread due to common asset exposures and broader funding and deposit relationships. In stress scenarios, sales by private credit funds or institutional investors can weigh on asset prices, weaken balance sheets, and amplify liquidity strains, the report argues.
However, systemic risk is driven by a combination of three separate, but linked, components: systemwide risk, contagion risk, and systemic importance.
