The conflict in the Middle East has been disrupting financial markets, raising concerns about rising inflationary pressures and global economic growth. One market that some investors are particularly worried about has not been heavily covered in the news: the private credit market. Even before the joint US-Israeli attacks on Iran on Feb. 28, global capital markets had faced growing structural pressure — the deteriorating funding conditions in the private credit market.
The private credit market is where companies borrow funds directly from nonbank financial institutions such as asset management companies, insurance companies and private lending platforms. Its popularity has risen since the 2008-2009 global financial crisis, after traditional banks’ lending capacity was limited by stricter regulatory controls. In addition, banks themselves have grown reluctant to lend. However, corporations’ funding needs did not diminish after the financial crisis; on the contrary, they increased due to expansions, and research-and-development efforts.
With traditional banks unable to meet corporate needs, a financial scheme emerged: create a fund, collect money from investors and lend it to companies. This alternative lending market became popular among small and medium-sized companies, as well as unlisted firms that had struggled to get bank loans. For investors, private credit offers high yields, greater flexibility in interest rate terms and diversified investment portfolios. As a result, the funding mechanism proved a big hit and market scale grew considerably.
By the end of 2023, the global private credit market had reached nearly US$2.1 trillion, 10 times the size of 2009, according to Prudential Financial Inc. Moody’s Ratings estimated the market could reach US$4 trillion by 2030, while McKinsey & Co forecast it could exceed US$30 trillion. Such optimistic views underscored the effects of rising global capital needs, the rise of asset-based financing, and the expansion of partnerships between alternative asset managers and specialist lenders.
While private creditors tend to be more lenient with their lending terms, the funds are not publicly traded, so relevant data are limited, information disclosure is insufficient and the industry is largely unregulated. After some of the borrowers went bankrupt in September last year and default risks continued to rise, investors started to reassess their risk portfolios and returns across the industry. Several well-known private credit specialists — such as Ares Management LP, Blackstone Group Inc, Apollo Global Management Inc and Blue Owl Capital Inc — saw significant declines in their stock prices over the past six months.
BlackRock on Friday last week became the latest fund manager to cap withdrawals at 5 percent from one of its biggest private credit funds after investor requests for redemptions spiked to 9.3 percent of their shares. Earlier last week, Blackstone pledged to meet 100 percent of redemption requests in its flagship private credit fund, after investors sought to pull a record 7.9 percent of assets from it. That came after Blue Owl Capital last month announced it was halting withdrawals in one of its private credit funds, and sold some of its loans to pension funds and its own insurance company.
The news comes amid growing concerns about structural risks in the private credit market. On the surface, the risk of more companies defaulting on loans and funds collapsing in the short term seems low, with what appears to be a few individual cases, so the private credit bubble is unlikely to burst overnight. Still, because the private credit market lacks transparency, if more funds face the same kind of problems in the longer term, it could trigger a domino effect across the industry, creating systemic risks for the overall financial market.
The conflict in the Middle East already has investors on edge, but stress in the private credit market could spook them even further. In this respect, Taiwan’s financial regulators must closely monitor trends and enhance supervision of the sale of overseas private credit funds by domestic financial institutions. Taiwan’s financial institutions, which are preparing to beef up their wealth management businesses, have a responsibility to promptly inform customers of any risks related to overseas fund products they sold. They also need to enhance the risk management framework, not only for the products, but also the risk exposure of their customers, prepare contingency plans and respond effectively.
The conflict in the Middle East has been disrupting financial markets, raising concerns about rising inflationary pressures and global economic growth. One market that some investors are particularly worried about has not been heavily covered in the news: the private credit market. Even before the joint US-Israeli attacks on Iran on Feb. 28, global capital markets had faced growing structural pressure — the deteriorating funding conditions in the private credit market. The private credit market is where companies borrow funds directly from nonbank financial institutions such as asset management companies, insurance companies and private lending platforms. Its popularity has risen since
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