Preparing for Tightened Control in the Private Credit Industry
The private credit industry is gearing up for increased regulatory scrutiny and evolving compliance requirements, with the Financial Conduct Authority (FCA) and other global regulators showing similar priorities towards increased regulation[1].
Research conducted by Ocorian has revealed that around 79% of private credit executives anticipate increased regulation within the next 12 to 18 months[2]. Despite this, only one in three private credit fund managers are considered well-equipped to meet these regulatory challenges[2]. The majority of private credit executives find the current regulation in their jurisdiction to be inadequate[3].
The European private credit industry, in particular, is entering a more scrutinized phase. Over half of private credit executives believe that private credit regulation in their jurisdiction needs improvement[3]. AIFMD 2.0, a clear signal of the shift towards increased regulation in Europe, underscores this trend[4].
The regulatory shifts occur alongside significant structural changes in the credit market. The implementation of stricter banking capital requirements under Basel III and Federal Reserve updates has made traditional bank lending more expensive and less flexible[5]. As a result, many banks have retreated from providing subscription and net asset value (NAV) credit lines, opening opportunities for private credit funds (PCFs).
PCFs, operating under fewer regulatory constraints, have rapidly adapted compliance strategies and offer more flexible, tailored financing solutions, often with fewer covenants and more borrower-friendly terms compared to banks[5]. This shift has made private credit a primary lending option in the market.
In response, private credit firms are focusing on strengthening internal compliance frameworks to meet evolving regulations while leveraging their operational flexibility to capitalize on market demand[6]. Over the next year, private credit firms can be expected to continue enhancing their compliance programs, possibly investing in technology and staff training, to navigate the changing regulatory landscape and sustain their expanding role as primary lenders[6][7][8].
Abi Reilly, partner and practice lead at Ocorian, stated that regulators are focusing more on alternative investment sectors like private credit[1]. Cato Holmsen, chief executive at Nordic Trustee, stressed the need for regulation to strike a balance, ensuring investor protection while preventing damage to market growth[9]. The balance of regulation is crucial to prevent damage to market growth while ensuring investor protection[9].
The private credit space's readiness to meet regulations will become a defining feature for successful managers[10]. The research also suggests that the industry is moderately well-prepared but actively adapting to increased regulation through updated compliance training and strategic shifts[1][2][3][4][6][7][8].
Sources:
- The Financial Times
- Ocorian Research
- Preqin
- European Commission
- Federal Reserve
- The Wall Street Journal
- The Economist
- The Financial Times (again for additional insights)
- Nordic Trustee
- Preqin (for the importance of readiness for successful managers)
Private credit firms are planning to intensify their internal compliance frameworks, potentially investing in technology and staff training, to adapt to the anticipated surge in regulatory requirements within the next 12 to 18 months. This strategic focus on compliance is essential for the industry's continued growth, as regulatory preparedness will become a vital trait for successful private credit managers.
