(Bloomberg) -- The booming private credit market is of growing concern to the top enforcement official at the US Securities and Exchange Commission.
During a wide-ranging interview this week, Gurbir Grewal said he sees a range of potential risks in the $1.7 trillion private-lending industry. The enforcement chief signaled everything from market concentration to the way assets are valued will face more scrutiny.
“I’m concerned about valuation issues: how they’re marking these investments because they are illiquid,” Grewal said. “I’m concerned about — as we would be with other private funds — fee and expense issues, and with conflict-of-interest issues.”
The SEC hasn’t brought many enforcement actions over private lending, and Grewal didn’t mention any specific firms or deals drawing regulatory attention. Still, his comments serve as a warning as some of the biggest names in finance increase their involvement.
Although private credit has existed for decades, it’s taken off since the 2008 financial crisis when banks pared their business lending to comply with stronger regulation. Firms like Blackstone Inc., Ares Management Corp. and Apollo Global Management Inc. have filled the lending gap left by banks, offering financing to businesses.
Growth in the industry has accelerated in recent years, up from just over $1 trillion in 2020. Pension funds, endowments and insurance companies flooded private credit managers with so much capital that they don’t have enough deals to invest it in.
Grewal said he understands the allure for investors.
“The performance has been where it has been,” he said. “And these entities can be less leveraged and their loss rates can be much lower. So there are those positives. I think what we have to do from our perspective is to make sure that folks are not abusing the lack of transparency.”
Rapid Growth
US regulators have stopped short of saying that the industry’s rapid growth represents an immediate threat to financial stability. However, they have for months been urging further scrutiny.
In February, Michael Hsu, the acting comptroller of the currency, said officials need to keep tabs on risks from private equity firms originating more loans and ramping up other activities typically done by banks.
Read More: PE’s Private Credit Push Can Pose Stability Risk, OCC’s Hsu Says
Private credit loans are typically held by the funds that made them until repaid — and are valued at marks influenced by the manager as well. This can be attractive to investors because assets are no longer subject to abrupt price swings, but it has also raised concerns over valuations.
Read More: Private Credit’s Code of Silence Is Hiding Market’s Flaws
Meanwhile, private credit funds face far fewer regulatory burdens than publicly traded companies and banks. The SEC regulates them as private-fund advisers, which have limited disclosure requirements and often great discretion on investments.
Under Chair Gary Gensler, the SEC has been attempting to bring greater scrutiny to private funds, which include hedge funds and private equity firms. However, earlier this month an appeals court blocked new rules that would force firms to detail their quarterly fees and disclose more about their expenses. The SEC is currently weighing its response to the ruling.
Deals
- Blackstone Inc., KKR & Co. and Antares Capital are among the firms that participated in a $1.4 billion financing to DuBois Chemicals to refinance existing debt
- Private equity firms looking to buy French software company Orisha are planning to use a loan provided by several private credit lenders to finance the acquisition
- Carlyle Group Inc. and Goldman Sachs Private Credit have provided a $1.1 billion payment-in-kind note to fund administrator Apex Group
- Bankers from Jefferies Financial Group Inc. have been sounding out investors, including private credit firms, about a deal to provide fresh capital to low-cost gym operator EoS Fitness Holdings LLC
- Hong Kong fintech company FundPark has obtained a three-year $250 million private loan with HSBC Holdings Plc as a senior facility provider, the second such investment the firm has secured this year
- Lazard Inc. is weighing several opportunities to acquire a private-credit firm that would help expand its $250 billion asset-management arm, becoming the latest Wall Street bank to seek inroads in the buzzy sector
- Software provider Zellis’s acquisition by Apax Partners has been supported with a £450 million unitranche facility led by SMBC Group and Park Square Capital
Fundraising
- HPS Investment Partners raised $21.1 billion of investable capital through the final close of its Specialty Loan Fund VI for specialty direct lending
- BlackRock Inc. is expanding further into private-markets investing, striking a new partnership to include the assets alongside traditional ETFs and mutual funds in model portfolios pitched to wealthy US retail clients
Job Moves
- Blue Owl Capital Inc. has hired four executives in Europe as part of a push to raise money from the region’s institutions
- Coller Capital has hired Roman Eggler as head of private wealth distribution for Germany, Austria, and Switzerland
- Orix Corporation USA has hired Nik Singhal as group head of direct lending as part of a broader reorganization the firm is undertaking to attract more external capital
- Glen Lim, Brian Stern, and Daniel Tola — finance lawyers specializing in private credit transactions — have joined the O’Melveny’s Los Angeles and Century City offices as partners in the corporate finance practice
Did You Miss?
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- Bobby Jain Sees Private Credit Competing for Hedge Fund Money
