MFA President and CEO Bryan Corbett penned a letter to the editor in Bloomberg News detailing how private credit enhances the stability of the economy and capital markets by providing capital, which banks no longer provide, for small and midsize businesses to grow, fund research and development, and hire new employees.
Private Credit Doesn’t Put the Economy at Risk
By Bryan Corbett
To the Editor:
Re: Nir Kaissar’s column “Looks Like Cash, Acts Like Stocks But Has a Catch” (June 23):
The article notes the strong returns and limited volatility of private credit over the last decade, but incorrectly argues that it is “too big to fail,” when, in fact, private credit enhances the stability of our economy and capital markets.
Credit funds enhance the economy by providing the capital, which banks no longer provide, for small and midsize businesses to grow, fund research and development, and hire new employees.
After the great financial crisis, during the pandemic and in the wake of the regional banking crisis, bank lending to midmarket companies continued to shrink. The share of lending by banks declined from 30% in 1994 to 3% in 2018. Credit funds stepped up to provide these businesses with much-needed financing. Without the critical capital provided by credit funds, small and midsize businesses would struggle during already stressed situations.
Private credit funds also enhance the stability of the capital markets by limiting systemic risk. Fund structures reduce volatility, and investor losses are limited to the investments made by the fund’s institutional limited partners.
The private credit industry’s diversity of funds and strategies limit concentration risk. More than 700 private credit funds manage 5% to 10% of the US loan market and support more than 15 domestic industries. Of those industries, no single sector makes up more than 20% of the total private credit loans reported. The heterogeneity of funds and strategies in the private credit industry spreads risks across the economy, ensuring that private credit loans are not concentrated in any one industry, geographic region or sector.
Further, the industry does not have an implicit or explicit government backstop: Taxpayers are not responsible for losses in the industry. Sophisticated institutional investors in the funds agree to long commitment periods. The long-term investment removes the liquidity risks present in banks or funds offering frequent redemptions. These contractual limitations allow private credit funds to hold assets to maturity and avoid forced selling, thereby reducing the volatility and liquidity mismatches we saw after depositors fled certain regional banks earlier this year.
Lastly, contagion risk also is mitigated because each credit fund is legally siloed off from other funds and market participants. If a fund fails, the losses are borne by that specific fund’s sophisticated investors and do not impact investments in other funds. Such a failure would be firewalled from rippling across the broader financial system.
Kaissar’s “too big to fail” rhetoric is misplaced given the lack of risk private credit poses to the financial system. He ignores the absence of contagion risk, taxpayer risk, liquidity risk and concentration risk in private credit. He was also silent regarding the benefits provided to small and midsized business and the markets more broadly.
Let’s not paint an inaccurate picture of private credit or understate its benefits to middle-market businesses. With the Fed attempting a soft landing, now is not the time to hinder small and midsize businesses’ access to capital. Doing so only raises the likelihood of a recession or worse.
Bryan Corbett is President and CEO of Managed Funds Association, the trade association that represents the alternative asset management industry