Private credit funds are crucial for America’s economic success. Credit funds enhance the economy by providing the capital necessary for American businesses to grow, fund research and development, and hire new employees. Across the country, private credit funds provide $1 trillion in capital to businesses that otherwise would not have access to the money needed to fuel their success. The U.S. economy would be weaker and unemployment higher without this important funding.
American businesses are not the only beneficiaries. Institutional investors, such as pensions, foundations, and endowments, receive steady returns from credit funds. These returns are used to support retirements, charities, and scholarships.
Private credit also enhances financial stability. Private credit funds limit systemic risk in five important ways:
- Removes risk to taxpayers: The industry does not have an implicit or explicit government backstop and taxpayers are not responsible for losses.
- Solves liquidity risk: Private credit fund investors commit investments for long periods of time and forgo the ability to redeem. This stands in stark contrast to banks offering daily redemptions.
- Reduces volatility: Long commitment periods allow funds to hold assets to maturity and avoid forced selling, which reduces volatility. It also provides long-term stability to corporate borrowers and other investors.
- Limits concentration risk: The heterogeneity of funds and strategies in the private credit industry spreads risks across the economy, ensuring that private credit loans are not concentrated in any one industry, geographic region or sector. More than 700 private credit funds manage 5% to 10% of the U.S. loan market and support more than 15 domestic industries. No single sector makes up more than 20% of the total private credit loans reported.
- No contagion risk: If a credit fund fails, the losses are borne by that specific fund’s investors and do not impact investments in other funds. The failure is firewalled from, and will not ripple across, the broader financial system or economy.
Private credit is an essential part of America’s capital markets that supplies much-needed capital for businesses of all sizes, improves returns for investors, and enhances financial stability.
