Republished with full copyright permissions from The San Francisco Press.

Private credit, a relatively new phenomenon that barely existed a decade ago, has grown exponentially as traditional banks have become cautious about lending. Major players in the financial industry, such as Apollo, BlackRock, and Goldman Sachs, are increasingly investing in this shadow banking space, alongside newcomers like DWS Group, Fidelity, and Softbank. With an increasing appetite for private credit, investors are flocking to illiquid and unregulated platforms, causing concerns for regulators worldwide. However, amidst the rapid growth, some challenges are emerging within the private credit industry itself.

Restricted Buyer Lists Threaten Liquidity:
Although private credit providers have successfully raised billions of dollars for investment, the existence of restricted-buyer lists is posing a potential obstacle. These lists exclude certain buyers, including reputable financial firms such as Apollo Global Management, Ares Management, and Tikehau Capital, from acquiring stakes in secondary deals. While secondary sales have been on the rise, the limitations imposed on prospective buyers may hinder efforts to enhance liquidity in the private credit market.

Implications for Insurers and Pensions:
Private credit is a favored investment option for insurance companies and pension funds, which have entrusted significant amounts of capital to this asset class. The presence of restricted-buyer lists could create challenges when these organizations need to retrieve their invested capital. The inability to find acceptable buyers may lead to frustrations among insurers and pensions, potentially impacting their future investments in private credit.

Balancing Illiquidity with Secondary Market Reassurances:
Investors in private credit recognize that this asset class inherently carries illiquid characteristics. Typically, private corporate loans are facilitated through closed-end vehicles that impose restrictions on withdrawals. However, the promise of a robust secondary market has offered reassurance to investors, allowing them to manage their exposure more effectively. The continued demand for second-hand stakes outweighing the available supply further demonstrates investors’ confidence in the viability of private credit.

While private credit continues to experience remarkable growth and attract significant investments from renowned financial institutions, challenges are emerging within the industry. The existence of restricted-buyer lists raises concerns about liquidity and the ability to access capital when needed. As regulators keep a close eye on this expanding market, finding a balance between illiquidity and the reassurances of a functioning secondary market becomes a crucial aspect for both investors and industry stakeholders.