The global credit rating agency has flagged the asset class as an increasingly important component of the global capital markets, warning that a significant shock could highlight how deeply private credit is embedded in the broader overall financial ecosystem. “Private credit’s pervasiveness could amplify a systemic shock and impact a wide range of investors and lenders, including pension and sovereign wealth funds, banks, insurance companies, foundations/endowments, high net-worth individuals and, increasingly, retail investors,” Fitch said in a recent report.
Such disruption could trigger far-reaching consequences for capital formation, credit availability, consumer confidence/spending, social safety nets, national development, depositor stability and insurance markets.
Despite the sector showing “bubble-like” characteristics - such as rapid growth, financial innovation, spread compression, rising borrower leverage, increasing competition and growing retail participation - Fitch says it does not yet consider private credit a systemic risk.
“This is because private credit is still a relatively small portion of the overall financial system and is typically facilitated through funds with committed capital, limited redemption risk and moderate fund-level leverage,” the agency noted.
Still, in the event of a systemic shock, the sector could face material losses or elevated redemptions. Due to the potential transmission effects and downside risks, Fitch argues the sector warrants closer monitoring and would benefit from stronger oversight and transparency.
The warning comes after ASIC called on Australia’s private credit industry to improve governance and transparency, urging industry bodies to proactively raise standards across both public and private markets.
The regulator estimates the Australian private credit market is worth around $200 billion, with about half tied to real estate finance.
Globally, Moody’s expects private credit assets under management to hit US$3 trillion by 2028.
Fitch concludes that in times of broader economic stress, private credit could act as a meaningful transmission channel given its growth and growing linkages across the financial system.
