A fresh report from Big Four firm KPMG has revealed that less than one in five financial services leaders fully understand their exposure to the private credit sector, raising fresh concerns about the industry's opacity. The study found that just 14 per cent of financial services executives believe they are fully aware of their ties to the private credit market, while over three quarters said it poses a significant risk to UK financial stability.
Lack of understanding among senior executives
Neil Connor, head of asset management at KPMG UK, described the findings as alarming. He said: “The lack of understanding about private credit exposure amongst financial services executives is alarming. If the most senior finance professionals don’t have a handle on private credit, how can we expect consumers to?”
Private credit refers to loans provided by non-bank institutions rather than traditional banks. These loans are negotiated directly with the borrower and are not publicly traded, offering investors higher yields in exchange for lower liquidity.
Ken Griffin warns retail investors
The new concerns follow hedge fund billionaire Ken Griffin questioning whether wealthy individuals are aware of the risks associated with investing in private credit. Griffin told the Financial Times in May that there was a “liquidity mismatch” between retail investors and the duration of investments. “We live in a world where retail investors have become accustomed to having immediate liquidity for their investments… investing in private credit is a different story,” he said.
Redemptions rock asset managers
Over the last few months, a wave of redemptions has hit asset managers on Wall Street. Investors in Blue Owl’s multi-billion dollar private credit fund asked to withdraw around a fifth of their money, amounting to $5.3bn. Blue Owl was forced to cap redemptions at just five per cent in response. Earlier, Blackstone allowed investors to redeem a record 7.9 per cent of shares from its fund, equivalent to around $3.8bn.
Investors have become increasingly worried that software and technology firms, which make up a large portion of the industry’s loan portfolios, are uniquely vulnerable to being disrupted or replaced by artificial intelligence.
Blankfein warns of financial crisis signs
A series of financial bigwigs have weighed in on the booming sector. Lloyd Blankfein, who ran Goldman Sachs from 2006 to 2018, warned this week he “smells” signs of another financial crisis. “I don’t feel the storm, but the horses are starting to whinny in the corral,” he said.
A report from Bloomberg Intelligence suggested banking giants Deutsche and Barclays ranked among the “most exposed” European banks to a private credit reckoning due to their north of three per cent exposure. Barclays is estimated to have around £20bn in exposure, equivalent to around 4.4 per cent of its total loans, while Deutsche’s €25.9bn amounts to just over five per cent of its loan book.
Barclays takes hit from MFS collapse
In its first-quarter results last month, Barclays recorded a £279m hit in its investment banking division. Around £228m of this – 82 per cent – came from a single name charge related to the collapse of London-based specialist lender MFS. Following this, and a £110m tie to collapsed subprime auto lender Tricolor last year, Barclays’ boss CS Venkatakrishnan said the bank was “constraining lending to certain structured finance counterparties who operate more vulnerable business models”.
UK private credit market grows 56%
The KPMG report, which tracks the views of more than 150 UK adults who are director level and above in financial services firms, comes after Britain’s private credit market is estimated to have grown by 56 per cent since 2015 to $185bn (£138bn), making it the second largest after the US, according to a recent report by the House of Lords.
Connor added: “Confidence in UK investment is fragile and private credit products can be complex, opaque and illiquid. The UK asset management industry must be keenly aware of suitability and understanding when it comes to promoting private credit.”
