White paper aims to educate US policymakers on private credit

It is hoped incoming policy makers will gain a greater understanding of the role private credit can play in economic recovery.

The American Investment Council, which represents the private equity industry in Washington, DC, has published a private credit white paper aimed at policymakers.

With a new administration and members of Congress having taken office in January, the AIC said it wanted to provide them with a ready-made primer on the role private credit plays in supporting American businesses.

Drew Maloney, president and CEO of the AIC, told Private Debt Investor: “This is part of a broader education initiative with Washington policymakers as there is currently a lack of understanding of private credit.

“Now is a critical time to talk to new members of Congress so we wanted to have a ready-made primer for them to see what the marketplace looks like today.”

In the US, private credit has been scrutinised alongside broader concerns about nonbank lending and leveraged finance, but the AIC argues that credit funds have important, countercyclical characteristics that distinguish them from other nonbank lenders.

The paper points out that credit funds are often incentivised to invest in debt worth below market value and help smooth out credit cycles. The long-term lock up structure of private credit funds also means they cannot suffer a run or fire sales of assets as banks saw during the global financial crisis.

AIC also hopes to inform policymakers of the role private credit is set to play in helping the US economy recover from the effects of the covid-19 pandemic. It points out that credit funds were able to fund companies early in the pandemic when banks and other lenders had pulled back. Covenants and lender protections used by credit funds were also demonstrated to be an effective way for lenders and borrowers to decide on actions to take with firms that got into difficulty as a result of the crisis.

Maloney adds: “My sense is that for SMEs today, private credit is the only place they can access finance. Banks have hunkered down during this time period and we’ve found private credit has become an important driver for business.”