SEC: Private credit market will face greater scrutiny
The private credit market is set to come under heightened scrutiny, the US Securities and Exchange Commission’s (SEC) director of enforcement Gurbir Grewal has warned.
According to Bloomberg, Grewal sees a range of potential risks in the growing private credit industry, notably valuation methods and conflicts of interest.
“I’m concerned about valuation issues: how they’re marking these investments because they are illiquid. I’m concerned about – as we would be with other private funds – fee and expense issues, and with conflict-of-interest issues,” Grewal told Bloomberg.
Read more: Hidden values: Special report on private market valuations
While he acknowledges the appeal of private credit for investors, he said the SEC’s main focus is to ensure that firms involved in the market are not abusing a lack of transparency.
His comments follow those of Michael Hsu, administrator of the federal banking system and chief executive officer of the Office of the Comptroller of the Currency, back in February. He said officials need to keep tabs on the risks associated with private equity firms originating more loans and increasing their involvement in activities that are typically carried out by banks.
Read more: Private credit valuations “appropriately priced”
Last year, the SEC introduced new rules to improve the transparency of private market funds. Under these rules, registered private fund advisers are required to “obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.”
Meanwhile, a report from the International Organization of Securities Commissions has warned that the global private capital sector is too complacent about possible risks, including interest rate risk. Higher rates can cause stress for borrowers, and could lead to higher defaults further down the line, which could then impact on investor returns.
Read more: Regulators increase scrutiny of insurers’ private credit investments
