According to a recent Moody’s Ratings assessment that cites regulators and industry groups, the fast expansion of private credit lending beyond its usual market exposes its opaque character and raises possible worries among regulators about its future hazards to the U.S. economy.

Recent years have seen an increase in competition for banks from private credit lenders, which are non-bank businesses that primarily serve mid-sized corporate customers by providing non-publicly traded loans.

In response to growing investor demand, private credit lenders have lately expanded into alternative lending alternatives outside this middle-market foundation, including asset-based finance, according to a research released by Moody’s on Thursday.

Banks, the traditional lenders for leveraged buyouts and the middle market, are seeing renewed competition from private credit lenders for funding.

Banks have refinanced $14 billion in loans that was previously supplied by private lenders this year until mid-May, according to PitchBook LCD data. Additionally, banks offered $44 billion in leveraged loans for M&A transactions until May 15; this is almost twice as much as they funded at the same time last year, according to Pitchbook.

As a result, private credit investors’ returns on their investments have decreased, which has forced lenders to look for new opportunities like investment-grade asset-based financings.

According to Moody’s analysts, “this highly diverse asset class – supported by far-ranging cash flows from receivables and leases – dwarfs growth potential for middle market lending,” especially since banks have started to turn over their consumer loan portfolios to these asset managers.

The growth of private credit has raised some potential risks, which the International Monetary Fund recently highlighted in its April Global Financial Stability report, opens new tab. “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. Moody’s cited regulators’ concerns that this “new era” of private credit growth poses a “growing interlinkage of risks,” the report said, especially as more banks and insurers partner with private credit lenders or take part in their fundraising.

According to the analysis, the credit assets under management of the four biggest publicly-traded alternative asset managers with private credit arms—Blackstone, KKR, Apollo, and—grew from just $481 billion in the fourth quarter of 2019 to $1.3 trillion in the first quarter of 2024.

One of the biggest problems the industry continues to present is a lack of openness. A U.S. appeals court invalidated an SEC regulation that would have given private investors additional information on June 5. According to Moody’s, the latest decision “suggests that enhanced regulatory oversight of the private fund industry may be a distance off.”

An email from the credit rating company Moody’s states that the report’s main points are the opaqueness of the private loan market and the dangers associated with it, as stated by third parties.

(Adapted from Reuters.com)

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