Private credit, or loans by non-bank lenders, has grown rapidly in recent years. This lending is even approaching the volume of some traditional sources of business credit, like bank loans. As the rise of private credit funds changes the way companies borrow money, it’s also creating potential implications for financial stability.

John Levin is a senior markets specialist in the Supervision, Regulation & Credit Department at the Federal Reserve Bank of Boston. He is the co-author of two studies examining the rise of private credit: “Could the Growth of Private Credit Pose a Risk to Financial System Stability?" and "Bank Lending to Private Equity and Private Credit Funds: Insights from Regulatory Data." For more interviews and discussions on private credit and financial stability, visit BostonFed.org/SixHundredAtlantic.aspx, and subscribe to our email list to stay updated on new episodes.

Maureen Heydt:

The term private credit refers to loans made by non-bank lenders to companies. As an industry, it has grown rapidly in recent years, approaching the lending volume of some traditional sources of business credit, including bank loans.

Indeed, in the United States, the private credit market has accelerated notably since 2019, growing from $46 billion in 2000 to roughly $1 trillion in 2023, adjusted for inflation.

But how large is the private credit industry? And what does the rise of it as an alternative form of finance mean for traditional lenders, like banks, and also for the broader financial system? 

I'm Maureen Heydt, and this is 600 Atlantic, a podcast produced by the Federal Reserve Bank of Boston. And today, we're taking a closer look at the growth of the private credit industry and what it means for banks and financial stability. 

John Levin is a senior markets specialist in the Supervision, Regulation, and Credit Department here at the Boston Fed. He's also the co-author of two new studies examining the rise of private credit. 

Welcome to the podcast, John. 

John Levin:

Thanks so much for having me, Maureen. 

Maureen Heydt:

So, let's start with the basics. In your words, how would you define private credit?

John Levin:

So, private credit is lending by funds that are typically created by large asset managers who seek to lend directly to mid-sized corporate borrowers, without a bank being involved as the underwriter or the originator of the loan. 

Maureen Heydt:

So, how does private credit differ from traditional business credit sources, like commercial and industrial loans, broadly syndicated loans, and high-yield bonds? 

John Levin:

So, private credit loans typically are direct loans to non-investment grade, privately owned, mid-sized companies. And unlike some other kinds of credit product, they typically don't trade in secondary markets and they're typically held to maturity by the private credit fund. 

Maureen Heydt:

The private credit market has really been growing exponentially. You and your co-authors found that it grew from around $46 billion in 2000 to roughly $1 trillion dollars in 2023. What are some of the factors that may have contributed to that rapid expansion? 

John Levin:

While we don't study exactly why it's been growing, some of the factors we've seen cited in other publications have been that investors are seeking new places to invest, particularly as interest rates fell after 2020 and didn't rise again until 2022. And private credit funds are the close cousin of private equity funds, they have some of the same parent companies. And those private equity funds launched new vehicles, in this case, lending to companies instead of buying them outright.

Maureen Heydt:

A lot of speculation has been made of the relatively opaque interactions between banks and private credit funds. And indeed, the estimates that you and your colleagues have made are just that, estimates. 

Why do we have to estimate? This data isn't publicly available? 

John Levin:

Private credit funds are opaque and they don't have to disclose as much information as other types of institution. So, my co-authors and I used regulatory data to which we have access, dug deeply into it, and uncovered some of the links between banks and private credit funds that would otherwise be opaque. 

Maureen Heydt:

And what kinds of things did you find? 

John Levin:

So, we looked at granular loan-level data on some 50,000-plus loans that are made by banks and provided to the Federal Reserve through regulatory data collections. While it's not easy to identify private equity and private credit funds as borrowers in this data set, we manually reviewed thousands of these loans, dug deeply into news reports, regulatory documents, and other sources to spot which ones actually turned out to be private equity and private credit fund borrowers, even if the names of the loan borrowers were not obviously those of funds. When we did this and aggregated the data, we found that there were about $300 billion worth of total loan commitments to private equity and private credit funds by these large banks.

Maureen Heydt:

So given the growth in the private credit market, a natural question might be whether private credit could someday replace traditional banks as a primary lender. So here's an interesting number from one of your studies. You found that large banks have made a total of $300 billion in loan commitments to private equity and private credit funds. That's 30 times more than it was just a decade ago. So why are banks lending so much to private credit funds and are they in effect, lending themselves out of relevancy? 

John Levin:

So, people do see the growth of private equity and private credit and wonder if private credit funds are actually taking market share from banks, and if in the future, businesses need a loan, they won't go to a bank, they might go to a private credit fund instead. While that's possible to some degree, what we actually find is that banks and private credit funds are not just competitors. They actually have a much more complicated symbiotic relationship, you might say. Banks are lending to private credit funds and the private credit funds in turn pass some of that credit onward to the end borrowers. This means that while there is a degree of competition, there's also this back and forth where private credit funds need lines of credit from banks, while banks see private credit funds as an attractive destination for lending. So, you might see banks doing less lending to end borrowers, but more lending to private credit funds, who then lend to the end borrower. 

Maureen Heydt:

Interesting. And so, are there any potential systemic risks associated with the increased linkages between banks and private credit, considering that banks provide significant liquidity to the private credit market? 

John Levin:

We do need to be mindful of potential for risks as the industry continues to grow. One scenario in which there could be losses for the banking system would be if there were particularly severe or prolonged defaults in the end companies that borrow from private credit funds. And this scenario could cause losses to spill onto banks that lend to private credit funds. 

So, this is something that we'll continue to need to monitor as we try to understand the evolution of the banking system. 

Maureen Heydt:

And so, going forward, what will you be watching as a researcher? 

John Levin:

So, we're always interested in important ways in which the financial system is evolving and what implications that it may have for risks or for the banking system. With respect to private credit, we'll be looking for increased links between private credit funds and banks. For example, additional growth of lending from banks to private credit funds as well as other partnerships or joint ventures that banks may be forming with these funds. Furthermore, it'll be interesting for us to try to figure out at some point whether private credit funds are adding to total lending or simply capturing market share from banks. 

Maureen Heydt:

Alright. Well, John, thanks for joining us on the podcast. 

John Levin:

Thank you so much, Maureen. 

Maureen Heydt:

For more information about the rise of the private credit market, we've linked the studies we discussed in the show notes. They are: ‘Could the Growth of Private Credit Pose a Risk to Financial System Stability?’ and ‘Bank Lending to Private Equity and Private Credit Funds: Insights from Regulatory Data.’ 

Check out bostonfed.org/600atlantic for more podcast interviews and seasons. And be sure to subscribe to Six Hundred Atlantic on your favorite podcast app. 

I'm Maureen Heydt, signing off for another episode of Six Hundred Atlantic. Thanks for listening.