A top US securities regulator said retail investors should “get out of the kitchen” if they cannot “take the heat” of investing in private credit, dismissing fears the asset class may threaten financial stability.
The comments by Securities and Exchange Commission chair Paul Atkins indicate US regulators are doubling down on their push to encourage average American workers to put more of their retirement savings into the $1.8tn market for loans to riskier borrowers, including private equity-backed companies.
Critics say the private credit industry’s relatively illiquid assets are poorly suited to the demands of retail investors to have quick access to their savings. Investors sought to pull more than $20bn from the asset class in the first quarter.
Atkins, however, said he had invested personally in private credit and had “seen the good, bad and ugly on that side, but you have to be willing to take a loss”.
“If you cannot take the heat, get out of the kitchen,” Atkins told an event at the IMF spring meetings in Washington. Praising the economic benefits of private credit providing funding after banks withdrew from lending to many businesses because of regulation, he said: “These are dynamic markets. But thank goodness we have them.”
“It is taking a risk. The risk should be fully disclosed. Just like anything else with Wall Street or whatnot, when a good thing gets going, money piles in, quality starts to go down because there’s too much money chasing fewer good deals. That is when you have to watch out.”
He added: “I think as we have been looking at this area, at least as of now, it is not a systemic risk.”
The US labour department, which oversees employer retirement plans, proposed a rule two weeks ago to make it easier for plan sponsors to include investments in private credit, as well as crypto assets and leveraged buyouts, by reducing the risk of lawsuits.
The rule, which fulfilled an executive order by President Donald Trump last year, is likely to funnel more of the $10tn US market for 401(k) retirement plans into riskier alternative assets such as private credit.
As loan portfolios face pressure from rising defaults, regulators, credit rating agencies and financial pundits are beginning to ask whether the private markets boom will lead to a more general crisis.
In the first three months of this year, $20.8bn of redemption requests hit major US groups in the sector, including Apollo Global Management, Ares Management, Blackstone, Blue Owl and KKR, according to FT calculations. The funds honoured just over half the requests they received.
Separately, Bank of England governor Andrew Bailey on Monday identified private credit as a key area of vulnerability in the global financial system.
Writing to finance ministers and central bank governors of G20 countries in his capacity as chair of the Financial Stability Board, Bailey said “liquidity mismatches, opacity and growing complexity in certain markets, notably private credit” represented a major faultline in global finance.
Marc Pinto, global managing director of private credit at rating agency Moody’s, told the same IMF event: “Retail investors are obsessed with liquidity — this is not like a mutual fund that you put money in on Friday and take it out on Monday.”
Paula Campbell Roberts, chief investment strategist at the global wealth division of KKR, one of the leading providers of private credit funds, said the fact that many of them were restricting how much money investors could withdraw showed the business model was working.
“The product, the structures, the wrappers, they are working as intended, because you don’t want everyone running for the hills at the first sign of problems,” she said.
