On 14 September, the International Organization of Securities Commissions (IOSCO) published a report on emerging risks in private finance markets.  Research from AIMA’s Alternative Credit Council (ACC) is cited throughout the paper when discussing the potential benefits of private finance and emerging risks.  

Key takeaways from the paper include:

• that private finance markets are inherently opaque, which presents challenges for regulators and for market participants to understand the scale of risk;
• the sector may be tested going forward and respond in ways that uncover hidden risks, such as excess corporate leverage;
• the changed investment landscape creates challenges to funding models in private finance, which have relied on access to cheap and secure sources of debt funding;
• flexibility of financing in private credit arrangements may help portfolio companies navigate short-term market strains, but defaults are nonetheless expected to increase over the medium to long-term;
• it is difficult to asses the scale of conflicts of interest in private finance, which exist among investors in different investment products of a single manager, as well as in some aspects of valuations, negotiation practices and GP-led secondary markets;
• new sources of capital such as retail investors could also increase risks related to liquidity mismatches and poor transparency.

This report was published alongside a consultation report proposing good practices for the leveraged loan and CLO markets on which IOSCO is seeking comments no later than 15 December 2023.

For more information, please contact Guillermo Pérez Molina, Private Credit Associate.