The head of Brookfield Corp. doesn’t think there is a systemic problem in the private credit sector, which has expanded rapidly but faces concerns due to its lack of transparency and increasing default rates.

“We do not … view today’s environment as a systemic problem, the area attracting the most attention represent only a very small part of the broader credit market,” Brookfield chief executive Bruce Flatt said in a letter to shareholders following the release of the company’s second-quarter results on Thursday. “What we are seeing is merely a healthy adjustment following a period in which abundant capital led underwriting standards to become too loose in parts of the market.”

Private credit, or lending by non-banks through privately negotiated deals, has proliferated in recent years.

“Strong investor demand has allowed private credit to expand into larger loans and a wider set of borrowers,” the Bank of Canada said in a report in May.

But because many of the lenders are not publicly traded, they are not obligated to make regular disclosures. That gives regulators less visibility into where risks may be building and how losses could spread through the financial system.

“High‑profile bankruptcies of several U.S. firms financed by private credit have raised questions about underwriting standards,” the Bank of Canada said. “Growing links between private credit funds and banks could allow stress in the sector to spread to the broader financial system.”

Private credit lending to businesses in Canada remains limited, but the potential for spillovers through global markets and financial institutions reinforces the need for continued monitoring, the central bank said.

In July, Brookfield completed its acquisition of Oaktree Capital Management Inc., a U.S.-based investment firm that specialized in alternative investments, including private credit.

Flatt said in the letter that the risks in private credit have received a lot of attention, but that the concerns are mainly about loans given to private equity-backed borrowers and software businesses. Brookfield, he said, is focused more on hard assets such as real estate and infrastructure, in which it has decades of experience.

“Lending against the same types of assets and businesses that we own and operate gives us a better understanding of asset values, cash flows and downside risk,” he said. “That understanding is especially valuable when markets become more complex and underwriting discipline matters most.”

The acquisition of Oaktree has also significantly expanded Brookfield’s presence in the United States. More than 60 per cent of its investment and asset management employees are now based in the U.S., the letter said.

Flatt said that the global economy has held up well despite the conflict in the Middle East and the resulting energy supply constraints. Investments related to artificial intelligence have also continued to support growth.

Factors such as high energy prices and the uncertainty around interest rates may be causing some tension in the short term, but he said none of these will matter too much in the long term.

“There’s no shortage of noise in the markets today,” he said on a conference call with analysts on Thursday. “While these factors may influence markets in the near term, our focus remains on firmly building long-term value across the business.”

For the second quarter, Brookfield Corp. reported 15 per cent growth in distributable earnings before realizations per share, which measures the cash earnings the company could pay to shareholders. Its DE of 66 cents per share was ahead of analysts’ expectations of 64 cents. The company’s distributable earnings increased to US$1.4 billion, compared to US$1.25 billion during the same period last year. Its net income for the quarter was $364 million.

nkarim@postmedia.com

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