Private credit, warning from the super authority to protect small investors

Beware of growing exposure to private credit on the part of small savers. The alarm was sounded bythe Financial Stability Board (FSB), the supranational body, based in Basel, which monitors the stability of the global financial system and coordinates the activities of the supervisory authorities.

In its 48-page 'Vulnerabilities in Private Credit' report published on Wednesday, the Fsb shone a further spotlight on a sector that has already been the focus of national supervisory authorities for months, particularly in Great Britain. 'Retailisation' is the term used in the paper to refer to 'the increased participation of retail investors in private credit markets', which, according to the Fsb, 'may be associated with more flexible repayment terms and could increase potential vulnerabilities related to liquidity imbalances'. The share of private credit in the hands of small investors has increased from zero to 13% over the past decade and this spread is growing, especially in the US.

The report goes on to point out that inexperienced savers 'may not fully understand the illiquidity of this asset class, which may amplify redemption requests during stress phases'.

The FSB obviously issues alerts where it identifies an excessive concentration of risks. Well, according to the super authority, there are three sectors where private credit funds are most concentrated: technology, healthcare and business services. The novelty is healthcare, which so far has not emerged as a risky segment, while, as far as technology is concerned, it is stressed that there is a great deal of attention especially on the so-called hyperscalers, i.e. the large providers of cloud and data services.

The lack of transparency and granularity of data are elements that make it difficult for the FSB to get a handle on the potential criticality of private credit estimated to be between USD 1.5 trillion and USD 2 trillion in size. However, there are trends that can show whether there is a deteriorating scenario. Among these indicators is the payment-in-kind financial clause present in some bonds or loan contracts that allows the issuer (the debtor company) not to pay the interest in cash on the due dates, postponing it until the end of the contract, obviously paying more. The report indicates that the Pik clause is used in about 12% of loans and that there has been a significant increase since 2022, coinciding with rising interest rates.