Now, though, cracks in that edifice are starting to appear.
Central bankers' rapid-fire rate hikes over the past two years have strained the finances of corporate borrowers, making it hard for many of them to keep up with interest payments. Suddenly, a prime virtue of private credit — letting these funds decide themselves what their loans are worth rather than exposing them to public markets — is looking like one of its greatest potential flaws.
Data compiled by Bloomberg and fixed-income specialist Solve, as well as conversations with dozens of market participants, highlight how some private-fund managers have barely budged on where they "mark" certain loans even as rivals who own the same debt have slashed its value.
In one loan to Magenta Buyer, the issuing vehicle of a cybersecurity company, the highest mark from a private lender at the end of September was 79 cents, showing how much it would expect to recoup for each dollar lent. The lowest mark was 46 cents, deep in distressed territory. HDT, an aerospace supplier, was valued on the same date between 85 cents and 49 cents.
This lack of clarity on what an asset's worth is a regular complaint in private markets, and that's spooking regulators. While nobody cared too much when central bank interest rates were close to zero, today financial watchdogs are fretting that the absence of consensus may be hiding more loans in trouble.
"In private markets, because no one knows the true valuation there's a tendency to leak information into prices slowly," says Peter Hecht, managing director at U.S. investment firm AQR Capital Management. "It dampens volatility, giving this false perception of low risk."
The private-lending funds and companies mentioned in this story all declined to comment, or didn't respond to requests for a comment.
Private credit was embraced at first for shifting risky company loans away from systemically important Wall Street banks and into specialist firms, but the ardor's cooling in some quarters. Regulators are doubly nervous because of the economy's febrile state. These funds charge interest pegged to base rates, which has handed them bumper profits — and made their borrowers vulnerable.
"As interest rates have risen, so has the riskiness of borrowers," Lee Foulger, the Bank of England's director of financial stability, strategy and risk, said in a recent speech. "Lagged or opaque valuations could increase the chance of an abrupt reassessment of risks or to sharp and correlated falls in value, particularly if further shocks materialize."
Values are especially cloudy outside the U.S., because of poor transparency. And it's the same for loans made by funds that don't publish quarterly updates or where there's a single lender with no one to judge them against.
Tyler Gellasch, head of the Healthy Markets Association, a trade group that includes pension funds and other asset managers, says policymakers have been caught napping. "This is simply a regulatory failure," says Gellasch, who helped draft part of the Dodd-Frank Wall Street reforms after the financial crisis. "If private funds had to comply with the same fair value rules as mutual funds, investors could have a lot more confidence."
The Securities and Exchange Commission has nevertheless begun to pay closer attention, rushing in rules to force private-fund advisers to allow external audits as an "important check" on asset values.