SEC enforcer quotes Taylor Swift in concern over private markets

by Laura Benitez

Top financial regulators around the globe are voicing concern about private credit valuations, whether lenders are hiding troubled loans, and the deep entanglement between private markets and insurance money. 

“Valuation risks are where we see a core issue,” Andrew Dean, the co-chief of the Division of Enforcement Asset Management at the US Securities and Exchange Commission, said during a Bloomberg regulatory forum in New York City on Tuesday. 

Dean was joined by regulators from the European Central Bank and the International Monetary Fund, who also emphasized a need to prod private credit firms about portfolio valuations and warned of potential issues arising from redemptions. 

Regulators have warned about a lack of transparency around private loan valuations and potential liquidity mismatches over the last year or so, as the market has ballooned to $1.7 trillion in size and interest rates have remained high. Some, including the ECB, have gone further to scrutinize how banks, private equity firms and insurers are tied to private credit, and how a lack of transparency could affect those groups. 

The ECB has asked around a dozen lenders for more information on their private credit exposures, Bloomberg reported last month. In the UK, the Financial Conduct Authority launched a review of private asset valuations last year, while the Bank of England has also warned that the opaqueness of private equity valuations could jeopardize financial stability.

“Systemic risk is something we think about,” Elizabeth McCaul, a member of the supervisory board at the ECB, said on the panel.

The regulators, who expressed apprehension around leverage and an uptick in borrowers deferring payments through so-called payment-in-kind loans, narrowed in on concerns that private credit is not silo-ed from broader financial systems. 

The SEC’s Dean used Credit Suisse Group AG’s loss after the collapse of Archegos Capital Management as “one example of why we care about the systemic risk,” he said.

Charles Cohen, an adviser at the IMF, said the fund wanted to “know more about the interconnectedness with private credit and insurance,” as insurers allocate more capital to “illiquid assets.”

“Given the growth, the stakes are real because more and more, we see private fund investors including retirement accounts and endowments with real people standing behind those,” Dean said. 

For the SEC, private credit deals are “illiquid level-three assets,” he said, defined as the most illiquid and the most difficult to value. While there hasn’t been a downturn for private credit, Dean pressed for more transparency and an ability to “stress test.”

“Private markets reminds me of the Taylor Swift lyrics: ‘Nothing lasts forever but things are getting good now’,” Dean said. “It will last as long as the risk-adjusted returns are there.”

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