Family offices defend private credit after IMF warning

As the IMF sounds the alarm for investor losses, industry participants in Asia and the US point to a continued role for the sector.
Family offices defend private credit after IMF warning

Asian family offices have defended increased allocations to private credit, following IMF warnings of investor losses in the sector amid continued high US interest rates.

The group’s latest Financial Stability Report warned that private credit’s rapid growth, and the accompanying pressure on managers to deploy capital, “may lead to a deterioration in pricing and nonpricing terms, including lower underwriting standards and weakened covenants, raising the risk of credit losses in the future.”

The report was published last month.

Andrew Sharrock
Landmark Family Office

“Like all credit products, there is always risk that the underwriting criteria does not capture all the risks, sometimes from information being provided from the borrower, but also how strict the lender is in enforcing covenants, validating information,” said Andrew Sharrock, chief investment officer of Landmark Family Office in Hong Kong.

But he emphasised investors’ familiarity with the sector’s risks.

“Generally, most ultra high net worth individuals (UHNWIs) are very sophisticated investors and thus understand the private credit product."

Sky Kwah, head of investment advisory at Raffles Family Office in Singapore, acknowledged that interest rate increases had led to a volatility in credit markets, leading borrowers and investors alike to look for alternatives.

But he noted the growing importance of the sector to his clients, for whom allocations have climbed steadily since 2022, as stretched public market valuations made it harder to generate returns there.

Sky Kwah
Raffles Family Office

“In discretionary portfolios, we have strategically allocated between 3% to 10% towards private credit investments.

"This allocation has seen a gradual increase over the past two years, primarily in response to the upward trend in yields. Private credit has transformed from a niche, institution-centric market to a pivotal component within a diversified investment portfolio,” he said.


A week before the IMF report was published, Thibault Sandret, head of private debt research at bfinance in London, told AsianInvestor that investors would lose out in the rush to deploy capital by some of the industry’s largest managers as fund sizes grew rapidly.

“Some [managers] are being very aggressive about the volume of capital they are raising and less selective in terms of deployment,” he said at the time.

The IMF report follows concerns raised in January by the $105-billion Ohio Public Employees Retirement System (OPERS). “Widespread defaults have not yet occurred. However, indications point towards trouble ahead,” according to a board meeting agenda seen by the Financial Times. 

Thibault Sandret

The IMF report pointed to the future role of lenders in initiating write downs in the sector.

“Leverage providers may decide to mark assets down significantly, given the riskiness of borrowers and the lack of comparable public pricing data,” it noted.

Leverage is a vital component of private credit returns.

A 2023 survey of 58 of the largest private credit funds by Cliffwater, a US alternative investment adviser and fund manager, found the average leverage level was 112%.

“[Leverage] can amplify volatility, especially in fluctuating interest rate environments, potentially leading to increased losses,” said Kwah. 

The IMF report called for enhanced reporting for investors, to support improved monitoring and risk management — part of a more intrusive supervisory and regulatory approach to private credit funds, their institutional investors, and leverage providers.


Delays in anticipated interest rate cuts in the US this year have increased pressure on private credit markets.

“The companies tend to be smaller, have more leverage than investment-grade securities, and if interest rates stay elevated for a long period of time, could induce financial stress at the company level,” said Daniel O’Donnell, global head of alternative investments at Citi Global Wealth, in Boston.

“Borrowers are generally less creditworthy than in the leveraged loan market and higher risk than those encountered in the investment-grade companies,” he noted.

A significant driver of investor flows in recent years has been more frequent liquidity, with many of the largest funds providing investors with chances to redeem on a quarterly basis.

According to Preqin, there are currently 522 so-called evergreen funds in existence globally, more than double the number in 2018. Total assets in the funds have reached $350 billion.

This has helped private credit funds with an Asia focus to reach $114 billion last year, according to the IMF, out of a total global market of $2.1 trillion.

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