Private credit

What is it and should you be worried about US collapses?

- Kalyeena Makortoff

The collapse of two US firms, First Brands and Tricolor, has shone a light on private credit and its growing influence in the global economy.

The failures have led to ballooning losses at traditional banks, and, coupled with worries about the health of US regional banks, have raised concerns about weak lending standards and potential threats from an opaque corner of the so-called shadow banking sector.

But what is private credit and should we be worried?

What is private credit?

Private credit emerged in the 1980s as a relatively niche industry offering private loans to businesses.

Unlike banks, where loans are backed by customer deposits, private credit firm loans are backed by money raised from private investors including pension funds, insurers and high net worth individuals.

But they have become increasingly intertwined with the traditional banking industry, with lenders in Europe significantly exposed to private credit firms.

The private credit industry boomed after the 2008 financial crisis, when regulators cracked down on traditional banks and forced them to hold more capital - in effect, a financial cushion against riskier loans.

The new rules also required banks to do more forensic checks on borrowers, making lending more expensive and slower. This created a gap in the market that private credit was ready to fill.

Meanwhile, private credit firms benefited from ultra-low interest rates after the financial crisis, which made it easy to borrow vast sums from traditional banks to further feed their ventures.

The industry falls under the umbrella of non-bank financial institutions (NBFIs), colloquially known as the shadow banking sector, which is dominated by alternative asset managers in the US including Blackstone, Apollo, Ares and KKR that also lead the private equity industry.