Regulators continue to wrongly clamor about the so-called “opacity” of loans to private businesses. When regulators, such as the ones that make up the Financial Stability Oversight Council (FSOC), proclaim there is too much opacity they fail to recognize (1) the differences between private funds, mutual funds, and depository institutions, and (2) the multitude of documentation that is already available.
Congress designed all private funds, including private credit funds, to be regulated differently from depository institutions and funds that solicit investment from the general public. Private credit funds use investments from sophisticated investors, such as pension funds and insurance companies. Most individual investors do not have access to private funds because of certain rules from the Securities and Exchange Commission (SEC). This past summer, the U.S. Court of Appeals for the Fifth Circuit struck down the SEC’s private fund adviser rule primarily because Congress wrote federal law in a way that delineates the statutory differences in regulation between private funds and public funds.
Private funds currently file certain disclosures to the SEC. The Dodd-Frank Act requires private fund advisers to submit Form PF documentation to the SEC or the Commodity Futures Trading Commission (CFTC). Form PF already requires private fund advisers to document fund risk metrics. Additionally, private fund advisers might have to file financial information under Form ADV or Form 13F, which are publicly available.
Business development companies (BDCs), which are a type of private credit fund, are heavily regulated and required to file documents with the SEC, including a Form N-2, which is supposed to highlight any potential “risk factors associated with an investment in the BDC.” These vehicles invest mostly in small to midsized private businesses. One article published by Bloomberg maligns one specific BDC in an effort to highlight potential risks in all BDCs. BDCs, however, offer stable yields and low risk even as they have grown exponentially over the years. According to S&P Global, of the BDCs they rate, the vehicles consist of “low leverage, diversified funding mixes, limited loss experience and affiliations with broader asset managers.”
Investors in private credit funds must disclose certain information. Insurance companies, which may invest in portions of a private credit fund, or tranches of middle market collateralized loan obligations (CLOs), are required to disclose balance sheet information to the SEC. Insurance companies, which are primarily regulated at the state level, also have to file financial data to their state regulators. Banks who may invest in a private credit fund or offer a subscription line of credit must file quarterly call reports detailing their financial condition. This information is public and may be found in the Federal Financial Institutions Examination Council’s database.
State regulations as adopted pursuant to the Uniform Commercial Code (UCC) also require private credit funds to disclose detailed information on collateral held in the loan agreement, such as the collateral’s “category,” “quantity,” or the “computational or allocational formula or procedure.”
If any private fund advisers, banks, BDCs, or insurance companies are publicly traded, then they would also have to regularly file 10-Q and 10-K reports to the SEC, which are publicly available on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database.
Private funds and their advisers are already well-regulated at both the federal and state levels. Existing rules and regulations already offer regulators and the public transparency into private credit funds. Additional calls for more transparency are unfounded—especially since there is no evidence of systemic risk in private credit funds.