The risky lending practice known as “private credit” is creating challenges for banks and investors, and the impact is being felt far beyond Wall Street.
Private credit emerged in the 1980s as a niche industry, providing private loans to businesses using capital from investors such as pension funds, insurers, and high-net-worth individuals.
The sector has grown significantly over the years and is considered by investment giant Morgan Stanley to be a $3 trillion industry.
The industry boomed after the 2008 financial crisis, when regulators required traditional banks to hold more capital, essentially providing a financial cushion against riskier loans.
However, as it has grown, its problems have become more visible, with two companies backed by private credit firms declaring bankruptcy in September.
These bankruptcies have raised concerns about the vetting procedures private companies use when lending, as well as how they, along with their banks and investors, will recover the funds.
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– What Is “Private Credit” & How Is It Causing Problems?.
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