Funding structures vary significantly in terms of regulation and incentives, influencing the behavior of the parties involved. Banks, heavily regulated institutions, operate with customer deposits while private credit funds, which are less regulated and often consist of pooled capital from institutional investors, have locked-in capital for extended periods. The light regulation on private funds leads to different incentives; fund managers will avoid acknowledging significant losses, especially when fundraising for new ventures, to maintain a favorable perception and attract investors.
There's been a lot of talk about private credit in recent years. The market has exploded in size, and there are worries that it could be a bubble that eventually bursts and sparks disaster. But there are other negative effects from private credit that might already be happening. In a new paper called "The Credit Markets Go Dark," co-authors Harvard Law School professor Jared Ellias and Duke University School of Law professor Elisabeth de Fontenay argue that the $1.5 trillion market for private credit is already having a big impact on the economy — and not in a good way. They say that the rise of private credit marks a seismic change for corporate governance and dynamism.
Read More:
Odd Lots Newsletter: The Black Hole of Private Credit
Private Credit Pushes Deeper Into Risk That Wall Street Is Fleeing
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