‘Alarming’ lack of private credit understanding in finance bosses
The elusive nature of the private credit industry has been called further into question with fresh data revealing less than one in five financial services leaders fully understand their exposure to the sector.
A fresh report from Big Four firm KPMG has found just 14 per cent of financial services executives believe they are fully aware of their ties to the private credit sector.
Meanwhile, over three quarters said it poses a significant risk to UK financial stability. Still, the consultancy giant found 40 per cent of UK asset managers plan to launch retail private asset vehicles through 2026.
Neil Connor, head of asset management at KPMG UK, said: “The lack of understanding about private credit exposure amongst financial services executives is alarming…If the most senior finance professionals don’t have a handle on private credit, how can we expect consumers to?”
Private credit refers to loans provided by non-bank institutions rather than traditional banks. These loans are negotiated directly with the borrower and are not publicly traded, offering investors higher yields in exchange for lower liquidity.
New concerns regarding the understanding of finance leaders follows hedge fund billionaire Ken Griffin questioning whether wealthy individuals are aware of the risks that come with investing in private credit. Griffin told the Financial Times in May there was a “liquidity mismatch” between retail investors and the duration of investments.
“We live in a world where retail investors have become accustomed to having immediate liquidity for their investments . . . investing in private credit is a different story.”
Over the last few months, a wave of redemptions have rocked asset managers on Wall Street.
Investors in Blue Owl’s multi-billion dollar private credit fund asked to withdraw around a fifth of their money, amounting to a staggering $5.3bn. Blue Owl was forced to launch a cap to limit redemptions at just five per cent in response.
It followed Blackstone allowing investors to redeem a record 7.9 per cent of shares from its fund – the equivalent to around $3.8bn.
Investors private credit fears grow
Investors have become increasingly worried that the software and technology firms that make up a large portion of the industry’s loan portfolios are uniquely vulnerable to being disrupted or replaced by artificial intelligence.
A series of financial bigwigs have weighed in on the booming sector, with Goldman Sachs’ boss through the financial crisis warning this week he “smells” signs of another financial crisis.
Billionaire investment banker Lloyd Blankfein, who served at the helm of Goldman from 2006 until 2018, said: “I don’t feel the storm, but the horses are starting to whinny in the corral.”
A report from Bloomberg Intelligence suggested banking giants Deutsche and Barclays ranked among “most exposed” European banks to a private credit reckoning due to their north of three per cent exposure.
Barclays is estimated to have around £20bn in exposure to the market, equivalent to around 4.4 per cent of its total loans. Meanwhile, Deutsche’s €25.9bn amounts to just over five per cent of its loan book.
In its first-quarter results last month, Barclays raked in a mammoth £279m hit in its investment banking division. Around £228m of this – 82 per cent – was cited as coming from a single name charge related to the collapse of London-based specialist lender MFS.
Barclays’ boss CS Venkatakrishnan said following this, and its £110m tie to collapsed subprime auto lender Tricolor last year, the bank was “constraining lending to certain structured finance counter parties who operate more vulnerable business model”.
The report from KPMG – which tracks the views of more than 150 UK adults who are director level and above in financial services firms – comes after Britain’s private credit market is estimated to have grown by 56 per cent since 2015 to $185bn (£138bn). This makes it the second largest after the US, according to a recent report by the House of Lords.
Connor said: “Confidence in UK investment is fragile and private credit products can be complex, opaque and illiquid.
“The UK asset management industry must be keenly aware of suitability and understanding when it comes to promoting private credit.”