CRS Considers Risks from Private Credit Redemption Restrictions

The Congressional Research Service ("CRS") reviewed risks in the $2 trillion private credit market amid concerns about widespread redemption restrictions.

Liquidity Risk

In its report, CRS stated that the private credit market, described as "a type of lending provided by nonbank financial institutions, such as alternative asset managers of private funds, to small- and medium-sized private companies," faces significant liquidity pressure. CRS said this was due, in part, to an estimated $500 billion exposure to software-as-a-service companies. CRS explained that automated coding capabilities, driven by artificial intelligence, have reduced revenue streams for these software firms, triggering a wave of investor redemption requests at the private credit funds. CRS said that several major asset managers recently faced redemption requests ranging from 7.9% to 14%, significantly exceeding their standard 5% quarterly redemption caps and leading to sharp stock price declines.

Valuation and Default Risk

CRS identified asset valuation challenges and rising default risks as central policy concerns. CRS stated that the U.S. private credit default rate has reached 5.8% and could rise to 8% amid ongoing AI disruption. CRS considered the risks of "run-like behavior" in private credit markets, noting that because earlier redeeming investors are cashed out at the reported net asset value, they are incentivized to flee if they suspect a fund's opaque, illiquid assets are overvalued. CRS highlighted a recent instance where a private loan was written down to "zero within [a] three-month [period], illustrating [the] speed of asset quality deterioration" and the difficulty of generating reliable valuations for illiquid assets.

Market Contagion Risk

CRS further reviewed the potential for broader market contagion, noting that, while many private credit funds use little or no leverage, some rely on bank funding, which creates spillover channels to global systemically important banks and could lead to tightened overall credit conditions or asset fire sales.

CRS cautioned that as policymakers evaluate these widespread redemption pressures, the primary objective of capital markets policymaking should be to "enable effective risk monitoring and accurate risk pricing," rather than attempting to eliminate risks entirely.