The private credit universe is expected to expand rapidly, with the rise of private credit ETFs and major partnerships between traditional banks and asset managers, fueling growth that could nearly double in the coming years, according to Moody’s analysts. .
Valued today at some $1.5 trillion, Moody’s expects private credit to reach $3 trillion over the next three years.
“Private credit is also evolving rapidly as investors allocate more funds into this area,” he says.
Encouraged by this immense growth, Moody’s ratings highlighted that asset managers are increasingly competing to establish themselves as comprehensive financial centers, catering to a diverse clientele ranging from retail investors to sovereign wealth funds, as the urgency to evolve and diversify increases.
Last month, Apollo Global affiliates, together with State Street, filed with the U.S. Securities and Exchange Commission (SEC) a private credit ETF aimed at democratizing access to this asset class , targeting not only wealthy individuals but also investors. at all income levels.
Beyond ETFs, Apollo has also actively partnered with global financial institutions. On September 20, Apollo secured a $5 billion funding commitment from BNP Paribas to support investment grade asset-backed transactions.
Shortly thereafter, on September 26, Apollo announced a $25 billion private direct credit program with Citi, which will focus on high-yield lending to businesses in North America, with plans to expand to the international.
“These strategic partnerships are just the latest illustration of how private credit is rapidly evolving beyond the scope of its core direct lending to middle-market companies,” Moody’s said.
One of the goals behind these strategic accelerations, the rating agency noted, is the coveted title of becoming a one-stop shop, offering a full range of private market investment solutions for everyone from retail investors to investment funds. pension and sovereign funds.
“Depending on the type of partnership, alternative managers can achieve significantly greater lending power at a much faster rate than organic growth,” he said.
“Achieving greater scale and diversification will become more critical as demand for capital accelerates in the global economy and clients want to do more with fewer general partners,” Moody’s explained, adding that partnerships with banks also allow alternative asset managers to significantly increase their lending capacity while avoiding the onerous costs of running a huge loan origination business.
At the same time, banks are also developing relationships with private credit, including providing loans to alternative asset managers, the report said. These partnerships allow banks to retain the less risky part of these transactions and maintain customer relationships, Moody’s noted.
But Moody’s warned that rapid growth in private credit could prompt increased regulatory scrutiny. Indeed, as these managers expand their network for retail investors, regulators will pay greater attention to ensuring that risk management oversight keeps pace with the expansion, he said.
The SEC is currently reviewing Apollo’s ETF filing, which Moody’s said could take time as the regulator examines transparency, liquidity assessment rules and governance, including who will provide the assessments .
On the other hand, the Federal Reserve is expanding data collection on banks’ exposure to nonbank financial institutions, reflecting a growing focus on the sector’s role in the broader economy.
“Ultimately, increased transparency may well be an inevitable consequence of the exponential growth of private credit,” Moody’s said.
“For today’s ambitious alternative asset managers, it will be increasingly critical to ensure that risk management oversight keeps pace with the rapid growth of the most risk-sensitive market segments. regulation, such as more “family” individual investors.
However, on the other hand, Moody’s said: “Too much transparency and liquidity could reduce the attractive premiums that alternative asset managers have managed to maintain.”
Last July, Citi highlighted that in Australia, the private credit sector emerged as a competitive threat to banks, due to its ability to provide flexible lending solutions and attractive returns to investors, likely to challenge traditional banking models.
As the market grows, Citi said Australian banks could face increased pressure to adapt their strategies to compete effectively with the growing influence of private credit funds.
On the other hand, the Australian Securities and Investments Commission has announced increased oversight of private markets overall, citing a lack of transparency and data.
