USA – ILLINOIS Trends and Developments Contributed by: Beth Vogel, Mayer Brown
positions than some other more traditional investments, creating issues for those inves - tors that desire easy access to cash. • Interest rate risk: As noted above, many pri - vate credit funds make floating-rate loans, but if they don’t, the value of existing debt could decrease in a rising rate environment. • Credit risk: The biggest risk to any private credit fund is the possibility that borrowers will default on their loans. Lending to non- public companies or start-ups inherently car - ries more risk compared to lending to estab - lished companies with proven track records. • Manager risk: This risk goes hand in hand with the credit risk of a private credit fund. The manager of a private credit fund will be making decisions on what credit risk the fund will bear, and if the manager makes poor investment decisions or fails to assess credit risk adequately, investors could face substan - tial losses from borrower defaults. • Concentration risk: Many private credit funds tend to invest in a limited number of deals, which could lead to a lack of diversification. If one of these deals goes sour, it can dispro - portionately affect the overall performance of the private credit fund. • Operational risk: Private credit funds can have operational challenges, such as difficulties in sourcing good deals, executing investments or managing risks associated with borrow - ers. These risks are typically less transparent than in public markets, and as the market becomes more crowded, the ability to source good deals could get harder. • Economic cycles: During times of economic stress or uncertainty, borrowers may strug - gle to repay the loans made by private credit funds, leading to defaults or reductions in the value of the private credit fund’s portfolio. • Regulatory risk: Private credit funds operate with less regulatory oversight compared to
public markets, potentially exposing inves - tors to higher risk. In addition, as discussed below, as private credit markets grow and especially as they attract more retail inves - tors, they may attract more regulatory scru - tiny. Changes in regulations or tax laws could affect the performance of private credit funds and returns to their investors. • Opaqueness: Evaluating and monitoring pri - vate credit loans requires specialised exper - tise. This may make it difficult for retail inves - tors to fully understand the risks of private credit funds. This is further complicated by how the investments made by private credit funds are valued. Such valuations of private credit investments are often subjective, as there is a lack of market pricing to rely upon (private loans rarely trade), and little infor - mation is provided on how they are made. Investors may not always have a clear view of the true value of the assets in the fund, which could lead to mispricing and unexpected losses. Many of these risks will likely lead investors to seek out experienced private credit managers furthering the fundraising success or the larg - est established private credit managers. The top 20 private credit managers have increased their fundraising share from approximately 35% of total capital raised in 2019 to 70% of total capital raised in 2024. Types of Retail Private Credit Funds Closed-end funds Closed-end funds are investment companies registered under the Investment Company Act of 1940 that require investors to commit their capital for a specified period, often five to ten years. During this period, the fund invests in pri - vate credit instruments, and investors receive periodic distributions from the income generated
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