New era of private credit growth highlights its opaque nature, Moody’s says

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The rapid growth of private credit lending beyond its traditional market highlights its opaque nature and potential concerns among regulators about its future risks to the US economy, according to a new Moody’s Ratings report that cites regulators and industry bodies.

Banks, in recent years, have experienced a rise in competition from private credit lenders: non-bank firms offering non-publicly traded debt mainly to mid-sized corporate borrowers.

Pushed by increasing investor demand, private credit lenders have recently branched out into alternative lending opportunities outside of this middle-market base, such as asset-based financing, Moody’s said in a report published Thursday.

Private credit lenders have recently seen revived competition for financing from banks, which are the traditional lenders for leveraged buyouts and the middle market.

PitchBook data shows that banks this year through mid-May have refinanced $14bn of debt previously provided by private lenders. Banks also provided $44bn of leveraged loans for M&A deals through May 15, roughly twice what they financed over the same period last year, according to Pitchbook.

This has, in turn, eaten into returns on these investments for private credit investors, leading lenders to find new opportunities such as investment-grade asset-based financings.

“This highly diverse asset class – supported by far-ranging cash flows from receivables and leases – dwarfs growth potential for middle market lending,” wrote Moody’s analysts, noting that banks have begun handing over their consumer loan portfolios to these asset managers.

The International Monetary Fund recently highlighted the potential risks posed by private credit’s growth. “While we do not see immediate red flags, we do worry that this asset class could become riskier as it expands in size,” the IMF wrote in its April Global Financial Stability report.

Moody’s cited regulators’ concerns that this “new era” of private credit growth poses a “growing interlinkage of risks,” according to the report, especially as more banks and insurers partner with private credit lenders or participate in their fundraising.

Four of the largest publicly traded alternative asset managers with private credit arms – Blackstone, KKR, Apollo and Carlyle– grew their credit assets under management to $1.3tn in the first quarter of 2024 from just $481bn in Q4 2019, according to the report.

Lack of transparency remains one of the greatest challenges posed by the market. On June 5, a US appeals court vacated an SEC rule that would have provided more information to private investors. The recent ruling “suggests that enhanced regulatory oversight of the private fund industry may be a distance off,” Moody’s noted.

Moody’s said its report underscores the opacity of the private credit market and cites third-party opinions about the risks this poses.

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