Private credit provides over $1 trillion in capital to businesses of all sizes helping them hire talent, invest in costly projects, purchase equipment, build facilities, and innovate. New data shows capital provided by private credit funds increased by 40% in 2023 compared to 2022.
This tremendous growth has led some to ask whether private credit poses systemic risks to the financial system. Here are the facts from three Federal Reserve officials:
- On May 8, Federal Reserve Governor Lisa Cook remarked that, “Private credit funds appear well positioned to hold the riskiest parts of corporate lending. These intermediaries generally use little leverage and are organized as close end funds, which means that investors cannot withdraw the funding supporting the investments.”
- On May 14, Federal Reserve Chair Jerome Powell commented that, in private credit, “many of the lending structures are not subject to a run in the way that banks have traditionally been. Their funding tends to be from limited partners who have their investment locked up for many years … It’s not obvious to me that at this point it’s a net loss to financial stability.”
- On May 20, the Federal Reserve’s Vice Chair for Supervision Michael Barr said, “One of the things that we see in the current structure of the private credit market is that most of the funds themselves are not highly levered entities. And today, at least, they are in a form that faces no run risks, so the investors in those funds can’t exit. They’re closed-end funds.”
The fact is that private credit funds provide stability to our economy during turbulent times, including the COVID-19 pandemic and regionally banking crisis of 2023. As MFA President & CEO Bryan Corbett noted in a LinkedIn article:
“It’s false to assume the alternative asset management industry injects instability into our economy. Active managers are vital contributors to capital markets. They stabilize markets by increasing liquidity, enhancing price efficiency, and reducing volatility… Knee-jerk regulation predicated on false assumptions will lead to less investment, less job creation, and fewer opportunities to insulate our financial system from risks.”
To learn more about private credit and its benefits, click here.
