Key Takeaways
- • Private credit has grown to an estimated $40tn globally, with direct lending accounting for roughly $2tn, and US and Canadian insurers hold around 35% of their assets in private form, according to OMFIF.
- • Of roughly 8,000 ratings on private credit instruments, only about 1,000 came from the three major agencies, while the remaining 7,000 came from specialised raters, some estimated to grade two to three notches more generously.
- • Private credit vehicles most exposed to software and AI-related repricing face a disproportionate refinancing wall over the next two years, though default rates have stayed close to 1%.
- • Roughly a third of the $2tn in direct lending AUM is undeployed 'dry powder', but its distribution is uneven and deployment during downturns is not guaranteed.
- • Regulators lack full cross-border visibility into private credit, and OMFIF's roundtable participants proposed an activities-based oversight approach as a response.
Summary
Private credit has moved from a niche segment of structured finance to a central topic in financial stability debates, according to the first instalment of OMFIF's new monthly Money Disrupted roundtable series. The market is estimated at $40tn globally, with direct lending accounting for roughly $2tn, while insurance companies in the US and Canada hold around 35% of their assets in private form. Participants described these figures as large enough to matter and opaque enough to raise concern.
Opacity begins with ratings. Of roughly 8,000 ratings issued on these instruments, only around 1,000 came from the three major agencies. The remaining 7,000 came from specialised raters, some of which are estimated to grade two to three notches more generously than larger counterparts. As a result, a 'triple-A' label may not carry the same meaning as elsewhere, and underlying collateral is often invisible even to sophisticated participants.
This opacity intersects with exposure to software and artificial intelligence. Over the past year, spreads on high-yield bonds and leveraged loans tied to software and services firms have moved together as markets reassess the creditworthiness of companies whose large language models could threaten their business models. A disproportionate share of the private credit vehicles most exposed to this repricing face a refinancing wall over the next two years. Default rates have so far remained close to 1%, broadly in line with high-yield bonds and bank loan books, and stress scenarios point to deterioration comparable to those markets rather than a markedly worse outcome.
The analysis argues that comparisons with the pre-2008 securitisation boom break down on maturity transformation. Today's asset-based finance vehicles, still dominated by banks rather than private credit funds, mostly avoid the short-term money market funding structures seen before the crisis. Where private credit funds offer liquidity, redemptions are typically capped at 5%. Still, roughly a third of the $2tn in direct lending AUM is undeployed dry powder, and its uneven distribution and uncertain deployment in downturns limit its value as a buffer. Direct lenders with revolving credit facilities could also face sudden funding demands in a dash-for-cash scenario without central bank backstops available to banks.
The roundtable also highlighted interconnection between private credit, private equity and insurance. A large share of direct lending flows to private equity-owned borrowers, and PE-owned insurers have been more willing to allocate to private credit than independently owned peers, raising questions about information advantages and conflicts of interest. Banks' exposure to non-banks through loan commitments and credit lines can reach as high as 600% of core capital for some institutions. Supervisory data are generally not shared across jurisdictions, and many private credit funds are domiciled offshore, where reporting is lighter. Participants proposed an activities-based oversight approach tracking leverage, interconnectedness and substitutability, though this approach may miss concentration risk among poorly capitalised institutions. The article concludes that private credit does not currently represent systemic risk but warrants close monitoring, with better data and possibly new backstops needed as the sector scales. The piece was written by Andrea Correa, Head of Research at OMFIF.
Opacity begins with ratings. Of roughly 8,000 ratings issued on these instruments, only around 1,000 came from the three major agencies. The remaining 7,000 came from specialised raters, some of which are estimated to grade two to three notches more generously than larger counterparts. As a result, a 'triple-A' label may not carry the same meaning as elsewhere, and underlying collateral is often invisible even to sophisticated participants.
This opacity intersects with exposure to software and artificial intelligence. Over the past year, spreads on high-yield bonds and leveraged loans tied to software and services firms have moved together as markets reassess the creditworthiness of companies whose large language models could threaten their business models. A disproportionate share of the private credit vehicles most exposed to this repricing face a refinancing wall over the next two years. Default rates have so far remained close to 1%, broadly in line with high-yield bonds and bank loan books, and stress scenarios point to deterioration comparable to those markets rather than a markedly worse outcome.
The analysis argues that comparisons with the pre-2008 securitisation boom break down on maturity transformation. Today's asset-based finance vehicles, still dominated by banks rather than private credit funds, mostly avoid the short-term money market funding structures seen before the crisis. Where private credit funds offer liquidity, redemptions are typically capped at 5%. Still, roughly a third of the $2tn in direct lending AUM is undeployed dry powder, and its uneven distribution and uncertain deployment in downturns limit its value as a buffer. Direct lenders with revolving credit facilities could also face sudden funding demands in a dash-for-cash scenario without central bank backstops available to banks.
The roundtable also highlighted interconnection between private credit, private equity and insurance. A large share of direct lending flows to private equity-owned borrowers, and PE-owned insurers have been more willing to allocate to private credit than independently owned peers, raising questions about information advantages and conflicts of interest. Banks' exposure to non-banks through loan commitments and credit lines can reach as high as 600% of core capital for some institutions. Supervisory data are generally not shared across jurisdictions, and many private credit funds are domiciled offshore, where reporting is lighter. Participants proposed an activities-based oversight approach tracking leverage, interconnectedness and substitutability, though this approach may miss concentration risk among poorly capitalised institutions. The article concludes that private credit does not currently represent systemic risk but warrants close monitoring, with better data and possibly new backstops needed as the sector scales. The piece was written by Andrea Correa, Head of Research at OMFIF.
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