Private credit has spent the past decade transforming from a niche lending strategy into a major force in global finance.
The market has grown to an estimated $2.3 trillion worldwide, providing companies with an alternative source of funding while giving investors access to higher-yielding assets.
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A recent report from EY found that regulators worldwide are shifting from simply monitoring private credit markets to taking a more active approach. Authorities are increasingly focused on lending standards, valuation practices, liquidity risks and the growing connections between private credit managers, private equity firms, insurers and banks.
Forecasts suggest the sector could surpass $4 trillion by 2030, but regulators want to ensure that stronger risk controls support expansion.
One area drawing attention is payment-in-kind (PIK) interest, where borrowers add unpaid interest to their loan balance instead of making cash payments. While the structure can provide companies with short-term flexibility, regulators are examining whether it could delay recognition of financial stress or increase losses if borrowers face difficulties.
Liquidity Questions
Liquidity is another major concern, particularly as semi-liquid private credit funds become more popular. Unlike traditional private credit vehicles, some newer products allow investors to request withdrawals periodically, even though the underlying loans are often long-term and difficult to sell quickly.
Concerns around liquidity have become more visible as some private credit vehicles have faced increased redemption requests.
So far in the second quarter, Apollo Global Management (NYSE:APO) has limited withdrawal requests from its non-traded private credit fund, Apollo Debt Solutions, after investors asked to withdraw 16.8% of their shares.
The flagship private credit fund of Cliffwater LLC capped redemptions at 5% in the second quarter after investors sought to redeem approximately 17% of the fund’s shares.
Meanwhile, Partners Group is restricting investor withdrawals from its $8.6 billion Global Value SICAV fund after redemption requests exceeded 5% of the net asset value, a move that rattled sentiment across private markets.
EY noted that periods of increased redemption activity have highlighted the need for stronger liquidity management and clearer communication around investment timelines, withdrawal limits and potential risks.
The Financial Stability Board has proposed a framework aimed at improving consistency in private credit reporting across jurisdictions, which could eventually lead to expanded disclosure requirements.
Regulators are also examining potential conflicts of interest as private credit managers increasingly operate alongside private equity firms and insurance companies, the report stated.
The increased scrutiny does not mean regulators are looking to slow private credit’s growth. The industry has expanded access to capital for companies and provided investors with new opportunities outside traditional markets.
EY said firms will need to strengthen data reporting, governance frameworks, valuation processes and investor disclosures as the market matures.
For an industry built on flexibility and speed, private credit’s next phase may depend on its ability to demonstrate transparency, discipline and effective risk management as it becomes a larger part of the global financial system.
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