[Private Credit Blooming]③ U.S. 'Regulatory Blind Spots' Raise Concerns... Korea Must Address Early-Stage Market Risks

Duplicate Collateral Loans by Some U.S. Managers Using the Same Assets
"Limited to a Few... Major Firms Practice Systematic Risk Management," Counterarguments Say
Korean Market Still in Early Stages, Needs a Robust Ecosystem Design

The global private credit market has grown so large that it now accounts for more than half of alternative investment managers' assets, but controversy has also arisen. The perception of safety has been shaken as some companies using private loans have gone bankrupt, and problems such as overvalued or double-counted collateral have come to light. Alongside its reputation for being "more flexible than banks and offering higher yields than bonds," it has also been labeled as "shadow banking."

Concerns Over 'Shadow Banking' Rise Amid Wave of U.S. Corporate Bankruptcies

At the end of last year, the consecutive bankruptcies of U.S. subprime auto lender Tricolor Holdings and auto parts company First Brands sparked concerns over private lending. When the complex debt structures and allegations of fraud at these companies were revealed, industry experts pointed out that this was not just an issue with individual firms but a sign of structural vulnerabilities in the market. It was found that, unlike banks, private lending institutions do not share collateral information, allowing multiple loans to be secured with the same collateral.

There has also been criticism regarding "credit risk transfer," where net asset value (NAV) is inflated to enable continued borrowing. Private credit funds bundle the corporate loan claims they hold as collateral, borrow additional funds from banks and institutional investors, and use these for new investments, distributions to limited partners (LPs), or refinancing existing loans. While this may appear to improve liquidity at the fund level, some point out that, in reality, the fund may be taking on the debt and risk of the borrowing companies.

Jamie Dimon, Chairman of JPMorgan, warned, "If you see one cockroach, it means there are more somewhere," calling the recent bankruptcies a signal of broader market issues. He pointed out that risk capital is accumulating outside the regulated banking system.

"Exaggerated Fears... Caution Against Hasty Generalization"

However, many argue that such warnings are not grounds to criticize the entire private credit market. First, Chairman Dimon is a leading figure in the banking sector, which competes directly with private credit institutions. His remarks can be interpreted as emphasizing the threat from competitors at a time when private credit is taking market share from bank lending, putting banks at a disadvantage.

In fact, there are opposing views within the industry. Mark Rowan, CEO of Apollo Global Management, the world's largest private credit manager, recently dismissed concerns, saying, "Fears about private credit are overblown." He argued that only some aggressive loans have been exaggerated in the market, while most large managers sufficiently manage risk through priority structures and collateral arrangements.

Ultimately, the "shadow banking" controversy emerging in the U.S. market is seen as "growing pains" that have arisen during the transition of the financial ecosystem, rather than a problem inherent to private credit itself. As banking regulations have tightened, the funding needs of small and mid-sized companies have shifted to the private sector, but oversight and evaluation systems have not kept pace with this shift.

Designing a Robust Ecosystem Should Come Before Importing 'American-Style Fear'

Given that the domestic private credit market is still in its infancy, the prevailing view is that excessive concerns are unwarranted. Instead, by expanding the market to allow institutional investors to better diversify their portfolios, the alternative investment market can mature further.

In fact, unlike the U.S., the Korean private credit market is still dominated by senior secured loans, infrastructure and real estate credit based on stable cash flows, and bridge loans for restructuring companies. In other words, the nature of borrowers, transaction structures, and collateral characteristics all differ from the U.S. market, and the lending approach is relatively conservative. An official from a pension fund stated, "At this early stage, there is no need to interpret Korean cases through the lens of U.S.-style risks."

At this point, some argue that Korea should use U.S. failures as a reference to design a better ecosystem. Transparency in collateral valuation, systems to prevent duplicate collateralization, frameworks for accumulating and sharing transaction data, and standards for managing fund leverage should all be meticulously established from the outset.

An official from the private equity (PE) industry emphasized, "Now is not the time to restrict the market with regulations, but rather to foster healthy growth. We should take the risk factors revealed overseas as lessons and use this as an opportunity to design a safer, Korea-specific private credit market."