Reckoning comes for private credit as SEC, global watchdogs sharpen their focus

Securities and Exchange Commission Chairman Paul Atkins confirmed this week that the agency is actively examining the private credit sector, including potential fraud investigations, even as he sought to reassure markets that regulators do not believe the industry poses an immediate systemic threat to the broader financial system.

Speaking at the Milken Institute's Global Conference in Los Angeles on Monday, Atkins said the SEC is coordinating its oversight with the Treasury Department, the Federal Reserve and other agencies. "We're monitoring it carefully with our colleagues at the Treasury and elsewhere – the Fed and whatnot," Atkins said. "We're taking it seriously."

The remarks reported by Barron's and other publications come at a sensitive moment for the private credit industry, which has ballooned to nearly $2 trillion in assets globally and is now drawing scrutiny from regulators on multiple fronts.

In recent months, the sector has been roiled by a series of pressures: loan defaults, sharply falling stock prices among alternative asset managers, and firms restricting investor redemptions. Blue Owl Capital was among the firms that drew attention after it temporarily halted returning capital to investors amid a surge in redemption requests.

A concerted regulatory effort

The SEC is examining several private credit fund managers as part of what Atkins characterized as normal supervisory operations. The Financial Stability Oversight Council – the interagency body that assesses threats to financial stability, of which the SEC is a member – has so far concluded that concerns in the sector do not rise to the level of a systemic risk, according to Atkins.

Yet the tone from global regulators is growing more urgent. The Financial Stability Board, which comprises central bankers, regulators and finance ministers from G20 nations, published a sweeping report Wednesday warning that private credit's growing interconnectedness with banks, insurers and investment managers is creating vulnerabilities that have not yet been stress-tested through a prolonged economic downturn.

The FSB flagged $220 billion in drawn and undrawn bank credit lines extended to the sector, though it noted that commercial data suggest the actual figure could be twice as large. It also warned that increasingly complex funding structures, opaque valuation practices and a lack of standardized data across the industry are compounding the risks.

"This includes riskier fund portfolio financing, banks providing revolving credit facilities to companies that are simultaneously borrowing from private credit funds, and private credit-focused partnerships between banks and asset managers becoming more common," the FSB said in its report.

The watchdog also flagged a rise in payment-in-kind loans – arrangements in which borrowers defer cash interest payments – as a potential signal of deteriorating credit conditions within certain portfolios. The sector's leverage is concentrated heavily in technology, healthcare and services, areas the FSB said remain largely untested under sustained economic stress.

From the smart money to main street

The market's changing character is also raising regulators' antennae. Private credit emerged primarily as a lender to mid-sized companies after the 2008 financial crisis left investment banks more leery of borrowers. Since then, it has steadily migrated upmarket to finance larger corporations while simultaneously opening its doors to retail investors through semi-liquid, publicly traded vehicles such as business development companies and non-traded real estate investment trusts.

That democratization of access has introduced a new dimension of risk. The recent wave of redemption pressures in the US has been driven in part by individual investors seeking liquidity from structures that were not designed for rapid-fire withdrawals.

Financial advisors navigating private credit allocations for retail clients are now grappling with how to evaluate liquidity risk in a corner of the market that has long prided itself on opacity and exclusivity. The redemption pressures at several large fund complexes have underscored how mismatches between investor expectations and fund structures can translate into operational crises – even in the absence of outright credit deterioration.

Read more: When clients ask about private credit: How advisors can address common concerns with confidence

European banks in the crosshairs

The risks are not just a US problem. European lenders are facing their own reckoning with private credit exposures that have come under the microscope during the current earnings season. Barclays divulged approximately $20 billion in private credit-related exposure, while Deutsche Bank reported a position of roughly $30 billion, equivalent to about 2% of its total loan book. BNP Paribas disclosed exposure of approximately $25 billion, representing around 3% of its loan book.

Both the European Central Bank and the Bank of England have flagged concerns about potential systemic risks in the sector. The Bank of England is conducting stress tests in parallel with industry participants, and its deputy governor raised concerns last month around asset quality, valuation discipline and liquidity management within the sector.

The FSB called on national regulators to strengthen their supervisory frameworks, including improving the sharing of risk management and governance practices among banks and non-bank institutions active in private credit. It also urged authorities to address gaps in loan-level data and to tighten scrutiny of liquidity mismatches between fund structures and underlying assets.

Atkins' broader regulatory reset

The private credit scrutiny arrives as Atkins is in the midst of a sweeping repositioning of the SEC's priorities. He has described his mission as turning the agency around from the direction it took under the Biden administration, with a sharper focus on actual fraud rather than technical rule violations by regulated entities.

Read more: SEC enforcement actions drop sharply, with focus shifting to investor fraud

Among the prior administration's initiatives that Atkins has blasted is the SEC's enforcement campaign targeting so-called off-channel communications, in which employees used personal or unapproved messaging platforms for business discussions – a practice that generated billions of dollars in fines across Wall Street. Atkins said the sweep uncovered no evidence of market manipulation or fraud directly linked to those violations.

At the same time, Atkins has not stepped back from private markets entirely. He indicated that the SEC is working closely with the Department of Labor on a proposed rule that could allow employer-sponsored 401(k) retirement plans to include private equity and other non-traded assets in their investment lineups. He said the agency would need to provide clear guidance to plan trustees about suitability criteria, including whether underlying debt is investment-grade or below.