<\/p>\n
As ETFs lure retail investors, private credit\u2019s advantages could be in peril.<\/p>\n
As private credit investments become increasingly popular with retail investors, the asset class may lose the very features that make it appealing in the first place, a paper from staff at the Bank for International Settlements (BIS) suggests.<\/p>\n
In a report released, BIS researchers examine the growth of retail investor participation in private credit. Over the past decade, the retail share of assets under management (AUM) in private credit funds has surged from effectively zero to US$280 billion, the paper said.<\/p>\n
That initial growth has come largely through closed-end funds \u2014 business development companies (BDCs) \u2014 and is poised to grow further with the advent of private credit ETFs earlier this year that aim \u201cto capitalize on the popularity of both ETFs and private credit.\u201d<\/p>\n
The first private credit ETFs \u201cpromise retail investors higher returns from exposure to illiquid long-term private loans while providing liquid shares that trade daily,\u201d the paper noted.<\/p>\n
However, this mismatch between funds that offer daily liquidity while holding largely illiquid private assets may pose risks to investors and financial stability, it warned.<\/p>\n
For instance, the existence of large, persistent discounts between an ETF\u2019s trading price and the value of its underlying assets could \u201craise doubts about the quality and accurate valuation of the underlying assets and lead to losses for investors,\u201d the paper said.<\/p>\n
These risks could be moderated by developing a secondary market for private loans, which would create a current price for these assets, enable faster adjustments in funds\u2019 net asset values, and facilitate arbitrage, it said.<\/p>\n
\u201cHowever, an open question is whether this would dilute private credit\u2019s very advantages,\u201d the authors wrote.<\/p>\n
For one, the creation of a secondary market would require loan terms to be more standardized, reducing the appeal of private credit to borrowers.<\/p>\n
An active market for these loans would also reduce the illiquidity premium that attracts investors, it said.<\/p>\n
Additionally, the existence of greater transparency in the opaque private credit market could push asset managers to more frequently mark their private holdings to market \u2014 eroding yet another advantage of private assets.<\/p>\n
\u201cAll in all, \u2018democratizing\u2019 access to private credit may undermine the very features that have sustained its growth,\u201d the paper concludes.<\/p>\n
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