The European Securities and Markets Authority (ESMA) has warned that risks in the US private credit market could increasingly affect European investors, as redemption requests from semi-liquid funds rise.
In its latest risk monitoring report, ESMA said recent problems in private credit appeared confined to the US, with no similar developments in European private credit funds.
However, it said risks to Europe were more likely to arise through investors’ exposure to the US market.
US semi-liquid private business development company (BDC) funds have experienced growing redemption requests following a series of developments in the market, ESMA said. Some funds faced requests above their usual limit of 5% of holdings each quarter, prompting them either to take steps to finance additional withdrawals or restrict them.
Funds experiencing redemption requests above the 5% quarterly limit included Blue Owl OBDC II, Blackstone BCRED, BlackRock HPS and Cliffwater Corporate Lending.
ESMA said the requests appeared to reflect a combination of factors, including a sharp AI-driven fall in software-as-a-service valuations in February, to which BDC funds have sizeable exposures, alongside worsening conditions for private credit providers.
These included lower US interest rates reducing margins, weaker economic performance outside the technology sector, tighter spreads and signs of deteriorating credit quality.
“Lack of transparency also appears a central risk driver,” ESMA said, noting that reporting for affected funds was infrequent, at quarterly or annual intervals.
“The associated infrequency and suddenness of revelations appear to further fuel investor nervousness and redemptions,” the body added.
ESMA said European private credit remained relatively small, at less than €100bn, with the size of the EU market meaning risks remained limited.
The regulator, nevertheless, highlighted broader vulnerabilities across financial markets, saying elevated valuations and deteriorating macro-financial conditions increased the risk of abrupt corrections.
ESMA chair Verena Ross said: “Investor optimism continues to support elevated valuations despite rising geopolitical tensions and a weakening economic outlook. The wider this gap becomes, the greater the risk of an abrupt market correction.
“Retail and institutional investors should remain vigilant and retain resilience, preparing to be able to withstand sharp market corrections.”
ESMA said institutional investors should maintain robust liquidity buffers, while warning that interest and credit risks were growing concerns across asset management.
