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Private credit “will remain transparent”

Private credit “will remain transparent”

The private credit sector will continue to self-monitor risks after a U.S. legal ruling showed tighter regulatory oversight was a long way off, according to Moody’s Ratings research.

The U.S. Fifth Circuit Court of Appeals recently ruled that the U.S. Securities and Exchange Commission’s (SEC) Private Fund Advisers Rule, which would require hedge funds and private equity firms to provide details of fees and expenses to investors, is outside the SEC’s authority.

The decision marks a major victory for the private funds industry, which has lobbied for its regulatory requirements to remain unchanged.

Read more: SEC: Private credit market to face tougher scrutiny

“Private credit participants will continue to self-monitor risk at a time when the market is rapidly expanding in new directions,” said Christina Padgett, an associate managing director in Moody’s Ratings’ private credit team. “The industry is entering a new era of growth that is well beyond the scope of the more traditional direct lending business to corporate middle market companies.”

The $1.7tn (£1.3tn) private lending industry is booming but has drawn criticism from authorities on both sides of the Atlantic for a lack of transparency.

While it was stated that the SEC decision will affect disclosures regarding fees, the UK Financial Conduct Authority expressed concerns about the transparency of valuation methodologies.

Read more: Hidden values: Special report on private market valuations

In a “Dear CEO” letter to alternative asset managers earlier this year, the regulator said it was examining valuation processes for private assets, including “individual accountability for valuation practices within firms, the governance of valuation committees, information reported to boards about valuations and oversight of these practices by relevant boards”.

Two U.S. senators, Sherrod Brown and Jack Reed, have written a letter to the nation’s financial regulators expressing concern about the risks posed by private credit funds that they say are “operating in the shadows.”

Read more: Regulators step up scrutiny of insurers’ private credit investments