The Risks of Unregulated “Private” Credit Funds

Abstract

The “private” financial industry—which contains financial instruments not traded on open exchanges and financial institutions that are underregulated—is no longer an ‘alternative’ to open financial markets. Between 2020 and 2023, assets in private funds grew by 34 percent, from $20.8 trillion to nearly $28 trillion. While private equity funds have been subject to attention from academics and policymakers, another institutional formation is growing rapidly and has received far less scrutiny: private credit funds. The private credit market has drawn borrowers who cannot secure credit from regulated banks—raising questions about their suitability for such unregulated market transactions. While borrowers benefit from flexible lending terms, these terms come at a higher cost. The private nature of these loans offers another key advantage: unlike corporate bonds, the loan terms remain confidential. The global industry of private credit has $1.8 trillion in assets under management, up from $500 billion in 2015. This article examines the history of this evolution in credit provision and the risks to limited partners and the broader financial system posed by unregulated private credit funds.