Private credit grown rapidly, but has vulnerabilities: IMF

By Ovunc Kutlu

ISTANBUL (AA) - Private credit has grown rapidly to provide long‐term financing to middle market firms, but the sector has "meaningful" vulnerabilities, according to the International Monetary Fund (IMF) on Monday.

"The sector could experience large, unexpected losses in a downturn," the IMF said in the newly released Chapter 2 of its Global Financial Stability Report.

"Private credit is typically floating rate and caters to relatively small borrowers with high leverage. Such borrowers could face rising financing costs and perform poorly in a downturn," it added.

The financial agency warned that liquidity risk could rise with the growth of retail funds, saying uncertainty about valuations could lead to a loss of confidence.

"Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private equity firms and certain groups of pension funds," it said.

The IMF advised that authorities should consider a more regulatory approach, prioritize the closing of data gaps, monitor closely and address liquidity and conduct risks in funds.