Global private credit markets will grow in 2025, Moody’s Ratings has predicted.
A number of factors are behind this growth, the firm’s report said, including lower interest rates, reduced default risk and economic strength in developed regions. In 2025, Moody’s said, private equity sponsors will be creating opportunities to mobilise US$300 billion of outstanding dry powder.
By 2028, the firm predicts that global private credit will hit US$3 trillion – driven by US growth.
As the private credit sector swells, banks are adapting to their changing place in the financial ecosystem. In 2024, at least nine large banks partnered with private credit lenders to grow their presence in the space. By giving private credit lenders access to their originations, banks are able to maintain their origination and customer relationship capabilities and garner risk relief on their balance sheets.
While these partnerships are popular, Moody’s warned that these strategies have not been tested in a downturn.
Others are taking a different approach, scaling their private credit investment capabilities internally. Moody’s highlights Goldman Sachs as one such case, with the bank establishing a capital solutions group and boosting its alternative investment team.
These collaborations allow banks to take greater risks, something limited by regulation and capital requirements.
Competition between broadly syndicated loan vendors and private credit managers has been increasing, the report noted, resulting in compressed returns in direct lending and weaker document protection. In turn, alternative asset managers are moving into asset-backed finance (ABF) investments for better returns. A particular area of interest is data centres, which are seeing strong financial demand.
This strategy can be achieved through insurance company partnerships, which invest general account assets into such vehicles. By 2030, Moody’s predicts that speciality finance private credit ABF origination will surpass US$1 trillion.
The growing use of ABF has prompted direct lenders to securitise such assets. Last year, 40% of asset-backed securities were privately issued – a figure Moody’s said will grow in the coming years.
Insurance companies, in turn, are also increasing their engagement with private credit, moving from public insistent grade assets to investment grade ABF assets, Moody’s stated. This can be done through partnerships with private credit managers, providing portfolio diversification, illiquidity premiums, stronger covenant protections and reduced asset volatility.
As in other aspects of the market, retail engagement is expected to grow. Currently, retail private debt is increasing at a faster rate than its institutional counterpart as alternative asset managers try to appeal to a broader range of individual investors. This has been seen in the issuance of private credit exchange-traded funds (ETFs) and regulatory shifts in Europe that facilitate market access to retail investors. In the US, the trend is set to continue; and if the SEC decides to broaden what counts as an ‘accredited investor’, access to private markets could be far greater for retail clients.
In order to provide shorter-term investments for retail clients, products are emerging that allow investors to buy and sell at any time; but Moody’s warned that this could lead to a liquidity mismatch between the equity leg of the ETF and the underlying private assets. In a stressed environment, this could lead to disappointing returns for individual clients.
Recent regulatory changes in this space include the requirement for banks with more than US$10 billion or more in assets must disaggregate private credit loans into five categories and report unused lending commitments, with regulators seeking better oversight and understanding of credit and risk concentrations. There are also proposed changes to FR Y-14 reports from the Fed, improving transparency and potentially reducing concerns of systemic risks around banks’ exposure to private credit.
Moody’s warned that transparency remains a key concern for this market. Private credit firms do not disclose the underlying financials of their assets, and any reports are inconsistent across firms. As such, valuations cannot be sufficiently assessed, and it is difficult to determine between asset- and fund-level leverage and the creation of tranche-structured leverage in ABS transactions.
In light of the new US administration, further changes are anticipated. Under a second Trump term, reduced pressure on enhanced disclosure and a focus on capital formation are expected.
Issuance is expected to remain in line with figures seen in 2024, according to data from Pitchbook, while event-driven deals will push up volumes.
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