Risk and Reputation in the Private Credit Market

Risk and Reputation in the Private Credit Market

February 2025

By Hermen Chow, Associate Director for Sandpiper’s financial services and professional services practices, based in Hong Kong.

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Over the past two decades, private credit has emerged as one of the most dynamic segments of the financial landscape, expanding significantly in response to changing economic conditions and regulatory environments. As traditional banks have retreated from certain lending activities, particularly since the 2008 financial crisis, private credit has filled the void, offering tailored financing solutions to businesses that may not fit the conventional lending mould.

The size of the private credit market at the start of 2024 was approximately US$1.5 trillion, compared to approximately US$1 trillion in 2020, and it is estimated to grow to $2.8 trillion by 2028. Private credit fundraising is widely used in the US and Europe, and is now beginning to gain traction in the Asia-Pacific region. We are witnessing international and local institutions such as Apollo, Barings, Blackstone, KKR, and PAG set up private credit funds in hopes of capturing opportunities in the region.

However, this trend brings significant risks that must be carefully managed. As the private credit market expands, so does the complexity of managing associated risks. Unlike public markets, where data is abundant and transactions are standardised, private credit often involves bespoke agreements with limited transparency. Meanwhile, regulators are paying closer attention to the private market as its popularity grows. The market is often opaque and complex, while also being subject to fluctuating economic conditions and regulatory scrutiny – all factors that pose significant reputation risks for private credit funds and their managers, potentially impacting their performance, valuation, and fundraising.

How funds and firms can manage reputational risks

While there is no universal solution for risk mitigation or handling negative events, some common strategies are effective. Understanding operational risks and having robust processes for aspects such as compliance is crucial. However, even the best-prepared firms cannot eliminate all risk. Therefore, it is essential to have a plan in place to manage potential reputational damage when issues arise. Here are three key considerations.

Transparency: Transparency is key in fostering stakeholder trust and effectively managing expectations. Robust and straightforward communication strategies will help sustain a positive reputation – this will likely include regular and comprehensive reporting on portfolio health, asset valuation methodologies, and the fund’s ongoing adherence to all relevant compliance standards. Such transparency demonstrates a commitment to openness, provides investors with the information necessary to make informed decisions, and mitigates against misunderstandings arising from market fluctuations or unforeseen events. Moreover, proactively disclosing successes and challenges reinforces credibility and strengthens long-term relationships with investors and partners.

Due diligence: A commitment to rigorous due diligence is not only a critical component of responsible lending, protecting investors from potential financial losses, but also enhances the fund’s reputation as a prudent steward of capital. Investors are more inclined to engage with firms recognised for their meticulous risk assessment processes, comprehensive evaluation of potential investments, and adherence to industry best practices. Demonstrating a thorough understanding of potential risks and proactively mitigating them instils confidence in the firm’s ability to navigate complex market dynamics and deliver consistent, long-term value.

Creating a robust communication plan: Any incident that poses a threat to reputation needs a swift and well-articulated action plan. Effective plans are those created in anticipation of incidents, rather than in reaction to them, so they can be executed swiftly. Any plan should address the root cause of the reputational harm and include proactive communication to all relevant stakeholders, including investors, media, and employees. The communication should clearly outline the steps being taken to rectify the situation and, critically, detail the measures implemented to prevent similar incidents from occurring in the future.

Given the intense scrutiny to which such plans are often subjected, careful crafting is essential. A plan perceived as inadequate or lacking in substance can further exacerbate the reputational damage, potentially leading to a loss of investor confidence and long-term financial consequences. Therefore, the plan must be comprehensive, credible, and demonstrably effective. The rise of private credit represents a significant shift in the financial landscape, driven by opportunity and necessity. As this sector continues to grow, effective risk management will be paramount for sustaining investor confidence and ensuring long-term viability. Using reputation as a strategic asset – through transparency, diligent practices, and robust communication – will allow private credit managers to successfully navigate the market landscape and its inherent risks. In this growing market, those who prioritise reputation and adopt rigorous risk management will be best positioned to thrive.

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