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1 1 (April 23, 2024)

handle is hein.crs/goveozk0001 and id is 1 raw text is: Private Credit: Trends and Policy Issues April 23, 2024 Private credit generally refers to a type of lending undertaken by nonbank financial institutions and made to small- and medium-sized private companies that are not publicly traded. As a rapidly growing market that competes with traditional bank loans, but with a different regulatory apparatus, it has drawn financial stability concerns from some observers. This In Focus explains private credit operations, trends, and policy issues. hat s Pr vate Credit? Private credit, also known as private debt, emerged in the 1980s when insurance companies started lending money directly to businesses. Unlike private equity, which involves ownership stake in businesses, private credit is a form of business debt. Major private credit investors include pension funds, foundations, endowments, asset managers (including financial firms that also engage in private equity activities), and insurance companies. Because some nonbanks often use asset managers to allocate their money rather than lending directly, industry activities are concentrated among multiple large private credit managers (Figure 1). Figure I. Top 20 Private Credit Managers with a traditional structure, giving the loans to businesses and holding the loans themselves, typically to maturity. Other types or subcategories of private credit include distressed debt (lending to companies in bankruptcy or near-bankruptcy), special situations debt (lending in unusual events such as mergers, acquisitions, and changes of control), bridge financing (short-term lending intended to sustain a firm while it seeks permanent funding), venture debt (lending to early-stage companies that normally receive venture capital backing), and mezzanine debt (debt that is subordinate to other debt but senior to equity in bankruptcy repayment orders). Figure 2. Corporate Debt Market Instruments Sm er Lan Size Larg- $0 $40 $80 5120 Source: J. P. Morgan. Source: Federal Reserve. Notes: Called capital refers to invested capital. Dry powder refers to committed but not yet deployed capital. Private credit is one of many alternative investments-a broad category of investments that stand in contrast to traditional investments such as holding publicly traded stocks and bonds. Private credit is available in the private market alongside private equity, hedge funds, private real estate, and venture capital. The Securities and Exchange Commission (SEC) has certain authorities that are relevant to private securities markets, which are less regulated than public markets are. The most common type of private credit is direct lending, where nonbank investors provide loans Businesses can borrow money from various lenders and markets. Figure 2 compares the typical loan size and riskiness of direct loans to other debt instruments. Private credit often involves small and middle-market borrowers that are not large enough to issue bonds. It overlaps with the market for leveraged loans, which are higher-risk loans to businesses with high indebtedness or low credit ratings. Private credit could compete with traditional bank loans but is usually riskier than bank loans. Market Trends Some industry sources estimate the size of the global private credit market to be roughly $1.5 trillion to $2.1 trillion in assets under management (AUM). This is comparable to the size of the $1.7 trillion leveraged loan market and a fraction of the more than $50 trillion U.S. fixed-income market (which largely consists of securities investments paying investors fixed interest payments). One large asset manager projects the private credit market's global AUM to reach $3.5 trillion by 2028 (Figure 3). Around three quarters of the global private credit market focuses its investments in the United States. Like private capital markets more generally, the private credit industry has recently experienced significant growth. Because private credit providers could borrow from or partner with banks, the industry is also somewhat intertwined with banking.

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