The private credit market has grown significantly across jurisdictions, with its total size estimated to be between $1.5 trillion and $2 trillion. This growth is driven by its ability to provide tailored financing options for companies, including those with higher credit risks or limited collateral. In the past, private credit mostly focused on medium-sized businesses and was available only to institutional investors, such as pension funds and insurance companies. However, it is now increasingly being used by larger companies and is becoming more accessible to retail investors.
The private credit ecosystem includes a variety of participants such asset managers, insurers, pension funds, and banks, with asset managers acting as general partners.
While the growth of private credit may bring benefits, it also affects potential vulnerabilities. Private credit at its current size and scope has not been tested during a severe economic downturn, which could expose leverage and borrower credit quality vulnerabilities.
This report provides an overview of the private credit ecosystem, identifying potential vulnerabilities related to interlinkages with banks. It also highlights the challenges in collecting and analysing data for effective monitoring of the sector. The report also discusses other potential vulnerabilities, such as interconnectedness with insurers and private equity firms, cross-border interlinkages, leverage, liquidity mismatches, and concentration.
