Senator Warren Calls for Scrutiny of Private-Credit Market Growth

Senator Elizabeth Warren has called for increased scrutiny of the rapidly expanding private-credit market. On Thursday, she sent letters to S&P Global Ratings, Moody’s Ratings, and Fitch Ratings, requesting information on how they evaluate the riskiness of private-credit products. Warren highlighted that overly optimistic credit ratings played a significant role in the 2008 financial crisis and sought details on how these agencies manage potential conflicts of interest and whether their methodologies for assessing private-credit products differ from those used for other financial instruments.

Warren also reached out to Treasury Secretary Scott Bessent, asking him to investigate the size of the private-credit market and its potential impact on the financial stability of the US economy. She cited a government assessment from the previous year that identified vulnerabilities in the private-credit market, including a lack of transparency and growing ties to banks and other financial institutions.

The private-credit market has been growing rapidly, posing challenges to banks' more regulated lending businesses. The amount of money obtained to lend to private-equity-backed enterprises has increased significantly, reaching about $700 billion in 2024. Jamie Dimon, the CEO of JPMorgan Chase, has compared the private-credit market to the mortgage market before the 2008 financial crisis, noting that while parts of direct lending are beneficial, not all participants do a great job, which can lead to problems with financial products.

JPMorgan and its competitors have seen revenue losses as their unregulated competitors in the private-credit market have grown. Dimon has allocated $50 billion of the investment bank’s capital towards providing debt financing for clients involved in acquisitions and other deals, effectively starting a private-credit operation within JPMorgan. Some investors have expressed concerns about how private-credit products are rated, pointing out that the firms packaging loans to back securities like collateralized debt obligations can choose their rating provider.

The major players in the private-credit industry, such as Apollo, Ares, and KKR, are employing a unique strategy. They extend credit that they originate themselves, often backed by high-earning assets like rail carriages and data centers, which lock borrowers into long-term debt. In exchange for tying up capital for nearly a decade, borrowers are willing to pay higher interest rates than they would from traditional banks. This is due to the long, expensive syndication process that involves securing ratings from S&P and Fitch, facing tough covenants, and often enduring long waits for funding. These loans, based on their credit quality, are equivalent to investment-grade bonds and merit higher rates due to the "illiquidity premium."