The IMF estimates that the private credit industry is now over $2 trillion in size, with 75% of it located in the US. It now rivals the leveraged loan and high-yield credit markets in size. Private credit offers borrowers more speed and flexibility and provides higher returns and less volatility to investors. 

While the advantages are clear, the IMF warns that as lending moves away from regulated financial institutions to private markets, systemic risks will increase. With private credit, there is less transparency, price discovery, and information about credit quality. Additionally, there is less information about how various players in the ecosystem are connected. Therefore, the IMF doesn’t see near-term risks but believes that as private credit keeps growing, there will be a need for greater regulation. 

On average, private credit borrowers tend to be smaller and have weaker balance sheets than companies raising money through syndicated loans or public markets. This means more downside risk in the event of rising rates or a negative economic shock. 

Currently, the IMF estimates that ⅓ of private credit borrowers’ financing costs are higher than earnings. It also warns that lending standards have weakened amid increased competition among lenders due to the influx of capital in the sector. 

Finsum: The private credit industry has experienced rapid growth over the last few years and now rivals the size of the high-yield credit and leveraged loan markets. Here’s why the IMF is concerned that continued growth could lead to systemic risks to financial stability.