As policymakers make it easier for retail investors to join the private market party, including that of private credit, a US not-for-profit that provides finance education recommends actions to prevent problems.

As jurisdictions such as the US and Europe widen retail investor access to private credit, it creates new risks that advisors need to grasp, a new report says. 

The CFA Institute Research and Policy Center has published new research into how expansion of private credit into retail investment markets changes risks facing investors and the financial system.

"Private credit has become an established part of the capital markets. Its further expansion into wealth segments and platforms, alongside defined contribution pension reforms, brings a wider group of investors into a market typically built around long-term, illiquid assets,” Olivier Fines, CFA, head of advocacy and policy research at the CFA Institute, said. “That places greater emphasis on fund design, governance, and valuation. Generally, these products are not designed or intended for broad retail distribution without the guidance of an advisor.”

President Donald Trump’s administration has allowed 401(k) retirement accounts to hold private market investments. In the EU, “ELTIF” structures enable wider access to areas such as infrastructure, private equity, private debt, real estate and unlisted companies.

Earlier this year, the private credit sector was roiled by worries about investors scrambling to pull money out of funds, an episode analysed by this news service.

Jamie Dimon, the outspoken JP Morgan CEO, famously dubbed private credit funds as “cockroaches.” In response, industry figures argued that private credit doesn’t deserve the unflattering moniker of “shadow banking” and that its practices are often more transparent and rigorous than those of traditional banks. 

Even so, the push by a number of governments and groups to widen access to private markets has caused unease.

A vibe shift
The new CFA research paper, entitled Private Credit Funds and the Retail Shift: Structural Vulnerabilities and Policy Responses, argues that as private credit becomes more widely available through semi-liquid funds, business development companies, digital platforms, and other retail-oriented vehicles, existing regulatory frameworks have failed to keep pace with the evolution of the market.

The research identifies areas where oversight, disclosure, and investor protection need to evolve to offer better protection for investors.

The report notes that “retail access” is best understood as an expansion of private credit into the upper tiers of private wealth offerings rather than a full democratisation of investor access for all.

The report recommends stronger private credit fund suitability and disclosure requirements for retail investors; more consistent valuation standards and greater transparency on valuation methodologies, fees, and pricing; stronger liquidity risk management and redemption stress testing; greater international coordination on supervision and data sharing; and closer oversight of net asset value-based lending and other forms of layered leverage.

The research also examines the growing use of covenant-lite lending, the implications of valuation practices for retail investors, and the increasing interconnectedness between private credit funds, private equity sponsors, and the banking system. 

(“Covenent-lite” loans carry far fewer protective conditions and restrictions for the borrower than a traditional loan. They can be seen as a sign of weakening credit standards, often a “red flag” for creditors.)