Private credit “will maintain its opacity”
The private credit industry will continue to self-monitor risks, after a US legal decision suggests that stricter regulatory oversight is far off, according to Moody’s Ratings research.
The US Court of Appeals for the Fifth Circuit recently held that the US Securities and Exchange Commissions (SEC) Private Fund Advisers Rule, which would have required hedge funds and private equity firms to provide details of fees and expenses to investors, were beyond the SEC’s authority.
The ruling marked a big victory for the private fund industry, which had lobbied to keep its regulatory requirements unchanged.
Read more: SEC: Private credit market will face greater scrutiny
“Private credit participants will continue to self-monitor risks at a time when the market is rapidly expanding in new directions. The industry is entering a new era of growth, well beyond the scope of its more traditional direct lending business to corporate middle market companies,” said Christina Padgett, an associate managing director with Moody’s Ratings private credit team.
The $1.7tn (£1.3tn) private credit industry is booming but has attracted criticism from authorities on both sides of the Atlantic about a lack of transparency.
While the SEC ruling would have impacted disclosure around fees, the UK’s Financial Conduct Authority has expressed concerns around the transparency of valuation methodologies.
Read more: Hidden values: Special report on private market valuations
In a ‘Dear CEO’ letter to alternative asset managers earlier this year, the regulator said it is examining valuation processes for private assets, including “examining the personal accountabilities for valuation practices in firms, governance of valuation committees, the information reported to boards about valuations and the oversight by relevant boards of those practices”.
And two US senators, Sherrod Brown and Jack Reed, have written to the country’s financial regulators with concerns about the risks presented by private credit funds, which they say “operate in the shadows”.
Read more: Regulators increase scrutiny of insurers’ private credit investments
