Investment Growth by Pictures of Money is licensed under CC BY 2.0
On August 12, 2024, RealClearMarkets published an op-ed written by ATR’s director of financial policy, Bryan Bashur. The article talks about the benefits of private credit, or loans to private businesses. The piece also discusses why regulatory scrutiny of private credit is unwarranted. You can read the full op-ed here.
The piece starts by describing how private credit is essential to financing the middle market of the U.S. economy. The article states that:
Private credit provides integral financing to about 200,000 middle market businesses that make up the backbone of the U.S. economy. Middle market companies, “with revenues between $10 million and $1 billion,” employ about 48 million people and make up over 30 percent “of private sector GDP.”
Certain securitizations, which perpetuate the flow of capital to middle market businesses and consumer financial products, such as credit cards, auto loans, and student loans, perform better than publicly traded securities. The op-ed points out that:
Other asset-backed securities enable financing for consumer financial products such as credit cards, auto loans, and student loans. All types of private credit, including asset-based private credit, offers higher yields and lower default risk compared to public fixed income, such as high yield bonds. Private credit loans are stable investments that do not pose any systemic financial risk.
Although private credit performs better than public debt, regulators continue to criticize the asset class for being opaque and illiquid. These arguments are baseless. The piece explains that:
Critics of private credit complain that it is too opaque. However, private credit transparency is designed to differ from public equities and debt. Private credit uses investments from accredited investors, such as pension funds, endowment funds, or wealthy individuals. The U.S. Court of Appeals for the Fifth Circuit recently struck down the Securities and Exchange Commission’s private fund adviser rule primarily because Congress never intended for institutional investors to receive exactly the same disclosures as individual investors.
Private credit’s illiquidity is a benefit to investors because they can earn higher returns in the form of an “illiquidity premium.” Illiquid funds also protect investors against volatility and are not as susceptible to rapid redemptions, or fire sales.
The article goes on to talk about how burdensome regulations on banks have enabled the outgrowth of private credit. The article discusses how:
Private credit is a free market manifestation of the status quo. For example, KKR and Carlyle purchased Discover’s portfolio of student loans. The loans may be used in asset-based private credit, which would offer debt and equity tranches to potential investors. Even some banks are adapting and launching their own private credit funds to provide “non-bank private capital to the middle market.” When government-mandated capital requirements prevent banks from holding certain assets, nonbank financing allows borrowers to continue to access affordable credit. If private credit is further regulated, the continuation of this financing will become much less affordable or terminate entirely.
The op-ed concludes by stating that policymakers need to bolster private credit, not attack it:
Scrutinizing private credit will inevitably hamper capital allocation to midsized American companies and individuals who rely on credit cards and other consumer financial products. Private credit has a role to play in the U.S. economy. Instead of criticizing new and innovative methods of private financing, policymakers need to embrace it and refrain from shortsighted interventions.