Brian Judge
Research Director, Berkeley Program on Finance and Democracy
As high-profile private credit fund managers face a surge in withdrawals stemming from jitters over the direction of the economy, BESI’s Brian Judge observes echoes of the days leading up to the 2008 financial crisis.
In a recent op-ed for Project Syndicate, Judge, who serves as research director of the Berkeley Program on Finance and Democracy, points to private credit’s embrace of opaque corporate structures and its role in leveraged investments as risks to the global financial system.
Private credit is lending that takes place outside the traditional banking system. Institutional investors, such as pension funds, invest in private credit funds, which tout consistent returns and high yields. However, private credit often lends to risky ventures that banks would turn away. Notably, the $3.5 trillion private credit industry helps power the high-risk leveraged buyouts for which the private equity industry has become infamous.
Additionally, in recent years, alternative asset managers have merged with life-insurance companies forming a “Bermuda Triangle,” Judge writes, where “a single sponsor controls three interlinked assets: a life insurer, an asset manager, and an offshore reinsurer.” This should concern us, he continues, because “when the same firm originates a loan, holds it in a fund it manages, values it using its own models, and reports that value to an insurer it owns, the result is unlikely to reflect what an independent buyer would pay.”
Considering size of the market, turmoil in private credit could ripple throughout the global financial system, Judge warns.
Read Judge’s full op-ed in Project Syndicate (free with email sign-up).