The $30 Trillion Question: Ready for Rewards, But Are Lenders Ready for the Risk of Private Credit?

I was honored to speak on the main stage recently at the annual Boston Fintech Week on private credit alongside Shari Noonan, CEO and co-founder of Rialto Markets and expertly moderated by Sarah Biller, the founder at Fintech Sandbox.

Keep reading to get a quick summary of what we covered.?

The Rapid Growth of Private Credit

The conversation at the Federal Reserve Bank of Boston was a deep dive into the rapid growth of private credit. A market segment that at the end of 2023 was valued at $2 trillion - some ten times larger than it was in 2009 - but the addressable market could actually be as much as $30 trillion or more according to McKinsey .

Even though the market emerged more than three decades ago, over the past few years it has grown rapidly and according to the IMF it’s outpacing other asset classes and delivering high returns.?

Balancing Reward and Risk

Of course, with great reward comes great risk. While private corporate credit has created significant economic benefits by providing long-term financing to corporate borrowers, the world of private credit is opaque and highly interconnected. If it continues to grow at its current rate with limited oversight, existing vulnerabilities could become a systemic risk for the broader financial system. Especially as the size of private credit and its role in credit creation now makes it large enough to directly compete with public markets and may see it become macro-critical and amplify negative shocks to the economy.?

There’s also growing concern that private credit has much less regulation than the banking sector.. . Couple this with the talent shortfall of credit risk analysts (there are more than 34,000 openings for these positions currently) and it’s a potential crisis waiting to happen.

AI’s Role in Mitigating Risk

During the panel discussion, we also discussed data and the use of AI to build solutions for an industry seeking private credit exposure. Fundamentally, many? financial institutions remain cautious about AI, a point Reetika Grewal, head of digital at Wells Fargo touched upon during another session. However, there is growing acceptance that purpose-built AI systems for analyzing the speed and complexity of credit today will play a role in automating portfolio management. These systems are also expected to safeguard a sustainable future for the private credit market.

Data-Driven Solutions for a Sustainable Future?

With the rise of innovative platforms such as EnFi and Rialto Markets, I believe that data-driven approaches and technologies will boost the scale and performance of the lending process for private credit investors. It will enhance the fundamentals of credit investing, such as prudent underwriting and robust portfolio management. No private lender should still be using spreadsheets or manually entering information when technology exists to do this at scale. But it will also help close the data gaps to ensure lenders can comprehensively assess risks, which will lead to improved monitoring and risk management.

A $30 Trillion Payoff, But What About the Risks?

The rewards of a possible $30 trillion payoff are of course great, but so are the risks. As recommended in the recent IMF Report, there’s a real need to “enhance reporting requirements for private credit funds and their investors, and leverage providers to allow for improved monitoring and risk management.”?

As for us, we’re working really hard at?EnFi to help lenders capitalize on that payoff while minimizing the risk.?