Private credit is ushering in a new era of expansion as it looks beyond traditional direct business lending towards commercial and consumer assets and real estate.
A new report from Moody’s highlights this boom, noting that credit assets under management (AUM) for four of the largest alternative asset managers – Blackstone, KKR, Apollo, and Carlyle – reached US$1.3 trillion in Q1 2024, up from US$481 billion in Q4 2019, showcasing an impressive 2.5x growth.
The private credit market, more broadly, is estimated to hit $2.7 trillion in the next three years.
According to Moody’s, alternative asset managers have been positioning their offerings to meet increased private credit investor appetite for investment grade fixed income opportunities within the much larger asset-based finance (ABF) market.
This highly diverse asset class – supported by far-ranging cash flows from receivables and leases – dwarfs growth potential for middle-market lending, the ratings agency said.
“Banks – which are being increasingly disintermediated in the corporate lending arena – are helping to fuel this growth. Some are hiving off consumer loan portfolios to asset managers who are less encumbered by prudential regulation and have more permanent capital and lower funding risk,” Moody’s said.
Moreover, as they continue to expand their lending turf, the ratings agency said alternative asset managers will continue to move towards asset-based finance, given the size of their investment requirements and the investment grade characteristics of the structured vehicles.
“This expansion by the alternative asset managers will continue to engage participation from traditional banks. It also increases non- bank lending concentration among the largest institutions as they continue to grow assets under management.”
Moody’s also touched on the partnerships struck between alternative asset managers and insurance companies, which have been driving private credit fundraising.
“These companies, in particular life insurers, have a strong demand to invest their capital in investment grade structured assets. Similarly, asset managers have welcomed the opportunity to partner with or acquire insurance companies as a way to deepen access to long-term capital,” Moody’s said.
To date in 2024, the report highlighted three such purchases, including KKR’s acquisition of the remaining 37 per cent in Global Atlantic, Blue Owl’s purchase of a minority stake in insurance company Kuvare, and Brookfield Reinsurance’s acquisition of American Equity Investment Life Holding Company.
“In recent years, insurance has become one of the biggest sources of assets under management concentration among major alternative asset managers.
“In contrast with bank deposits or retail investors, insurance companies can benefit from the illiquidity premium with less associated risk,” Moody’s said.
Opacity remains a challenge
This rapid and diversified growth of private credit is occurring alongside calls for increased scrutiny from organisations like the IMF, the Bank of England, and the Federal Reserve.
While not seen as an immediate threat, the IMF’s April 2024 Global Financial Stability Report cautioned of potential vulnerabilities that could stem from limited oversight of this “opaque and highly interconnected” segment of the financial system.
In the US, meanwhile, the US Court of Appeals for the Fifth Circuit vacated the SEC’s Private Fund Advisers Rule last month, which required hedge funds and private equity firms to disclose fees and expenses. This ruling, seen as a victory for the private fund industry, opposed changes to existing regulations.
According to Moody’s, globally, the issue of private credit transparency remains contentious.
It noted that with escalating competition between direct lenders and the broadly syndicated loan (BSL) market, certain tendencies traditional to the BSL market are migrating to private credit.
Direct lenders are offering more favourable terms and flexibility to private equity sponsors while reports indicate high-profile borrowers in private credit are controversially shifting assets to secure financing, highlighting challenges in oversight compared to public markets.
This opacity is also making it challenging for investors to understand potential risks in private credit portfolios, the ratings agency said.
“In a down cycle, lenders can be less proactive about timely adjustments to asset valuations, and this may overstate private credit fund performance,” it said.
Moreover, Moody’s flagged existing concerns regarding potential credit weaknesses following an extended period of monetary tightening.
“Many leveraged finance issuers were able to source liquidity from private credit when interest rates climbed and risk aversion spread. This may indicate greater stress within private credit portfolios that have more exposure to weaker companies,” the analysts said.
“While performance has so far been fairly healthy, if uneven, increased stresses could have ripple effects.”
