Private Credit Trades Between Friendly Funds Are Too Dicey
You pays your money, you takes your chance.
Photographer: H. Armstrong Roberts/Archive Photos/Getty Images
Take two private credit portfolios run by the same firm for different investors: Should the managers be allowed to trade unlisted assets between them? It sounds like a practice mired in conflicts of interest and ripe for abuse — and yet lobbyists for big funds are asking US watchdogs to lift the ban on such transactions.
The push by the Alternative Investment Management Association, reported recently by Bloomberg News, comes with the caveat that so-called cross-trades between affiliated funds use independent, third-party valuations. That sounds reasonable, but it places an awfully big responsibility on those pricing firms. They will live or die on their reputations for robust work, just as auditors or credit-ratings companies do — and that hasn’t always worked out well.