Transparency be damned. That seems to be the mantra markets are embracing wholesale, leading, paradoxically, to less information for them to impound in the service of price discovery.
Consider first private credit. The clue is in the name. Private, hence no transparency needed, so the thinking runs.
This author has written before about the dangers of private credit, prime among them being that nobody, or very few at any rate, knows to whom loans have been made, how many borrowers have defaulted or are near default while paying interest in kind, and which insurers are on the hook if these defaults spike.
Falling returns, one of the few nuggets of information available about these funds, point to significant problems. Gating by private credit funds, which stops existing investors from withdrawing their capital, has essentially slowed any potential implosion and kicked the can down the road.
Jane Street, yes, the one that drew SEBI’s ire, recently refinanced its public debt with private credit. It paid almost 160 basis points more than on the debt it was refinancing to take advantage of the reduced reporting required in private credit, essentially paying for greater opacity and less transparency.
A recent paper by Drall and Granato indicates the mechanisms through which potential future losses may be socialised, with private equity-owned insurers whose downstream investments include opaque private credit acting as a key transmission channel.
The scale and details of the problems surrounding private credit remain unknown. What is clear is that it has become an enormous market worth several trillion dollars, and all is not well.
Next, consider the financing of the AI boom. The alarming lack of transparency is creating a significant gap in understanding who has made what future commitments.
Circular financing is now understood to be common, with the round-tripping of money causing investments to show up as revenue, much of it in the future and contingent on the status quo, more specifically, on no entity going bust.
The scale is staggering. The BIS annual report estimates that more than half of hyperscaler and chip manufacturer revenue is attributable to circular financing. Disturbing though that is, it is not all.
Recent investment bank reports have suggested that hyperscalers’ future lease commitments to data centres now being built exceed $1.5 trillion. These are committed payments that do not appear on current financial statements except in footnotes.
In addition, hyperscalers appear to have purchase commitments for chips, memory, power and other data-centre infrastructure amounting to $1 trillion. Again, these are legally binding agreements, not discretionary spending.
They therefore have much the same economic character as debt, except that nobody really knows how much is owed, to whom or for how long. These enormous numbers deserve scrutiny, especially because they affect public-market entities.
Nor do hyperscalers break out revenue from AI, the ultimate measure of whether these investments and commitments are paying off as intended. Instead, it is generally reported under “cloud revenue”, a catch-all for computing outsourced by businesses to hyperscalers.
Cloud revenue was a key driver of hyperscaler revenues even before AI came along. Investors are therefore left to guess whether recent revenue growth is the result of these investments and commitments or simply a continuation of previous momentum.
Stack this up against the complete erosion of hyperscaler free cash flow, their mega equity raises and widening credit spreads on enormous debt issuances, and it is little wonder that unease is building.
Reporting Retreat
Finally, consider the Trump administration’s recent moves to reduce the frequency with which public companies report financial and business data.
The SEC’s proposal to replace quarterly reporting, the gold standard of transparency on which many markets are modelled, with semi-annual reporting in the name of lower compliance costs is another move towards reducing transparency. It is a clear step backwards.
The examples above show that even with existing regulations, material exposures remain unknown. Unsurprisingly, the proposal has received more than 200,000 objections, largely from small retail investors, hedge funds and investor advocacy groups.
These investors would either have to depend on Wall Street’s privileged access to information or rely on outdated metrics.
A forgotten lesson of the global financial crisis was the lack of transparency around banks’ derivative positions and the web of unknown exposures. The scale of the positions obscured by the current bout of secrecy is becoming similarly enormous.
One obvious impact is that risk premia are likely to increase, as the Jane Street refinancing illustrates, eventually putting pressure on asset prices.
What will be the downstream impact on markets and economies of this enormous assault on transparency? Nobody really knows. What is clear is that discomfort is building.
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