Private credit set to ignite with ETF launch and banking partnerships

The private credit universe is expected to expand rapidly, with the birth of private credit ETFs and major partnerships between traditional banks and asset managers fuelling growth that could nearly double its size in the coming years, according to Moody’s analysts.

Valued at some US$1.5 trillion today, Moody’s expects private credit to grow to US$3 trillion over the next three years.

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“Private credit is evolving as quickly as investors allocate more funds in this space,” it said.

Spurred by this immense growth, Moody’s ratings highlighted that asset managers are increasingly competing to establish themselves as comprehensive financial hubs, catering to a diverse clientele ranging from retail investors to sovereign wealth funds, as the urgency for scale and diversification grows.

Last month, subsidiaries of Apollo Global, in collaboration with State Street, filed with the US Securities and Exchange Commission (SEC) for a private credit ETF aimed at democratising access to this asset class, targeting not just high-net-worth individuals but investors across all income levels.

Beyond ETFs, Apollo has also been actively forming partnerships with global financial institutions. On 20 September, Apollo secured a US$5 billion funding commitment from BNP Paribas to support investment-grade, asset-backed deals.

Shortly after, on 26 September, Apollo announced a US$25 billion private credit direct lending program with Citi, which will focus on high-yield lending to corporations in North America, with plans to expand internationally.

“These strategic partnerships are just the latest illustration of how private credit is rapidly evolving beyond the scope of its core direct lending to corporate middle market companies,” Moody’s said.

One goal behind these strategic ramp-ups, the ratings agency noted, is the coveted title of becoming a one-stop shop, providing a full range of private market investment solutions for everyone from retail investors to pensions and sovereign wealth funds.

“Depending on the type of partnership, alternative managers can achieve much greater lending clout at a much faster pace than the path of organic growth,” it said.

“Achieving scale and greater diversification will become more essential as capital demand accelerates across the global economy and clients want to do more with fewer general partners,” Moody’s explained, adding that partnerships with banks also enable alternative asset managers to significantly increase their lending capacity while avoiding the onerous costs of running a huge loan origination business.

Banks, meanwhile, are also building out relationships with private credit, including lending to the alternative asset managers, it said. These partnerships allow banks to keep the least risky part of these transactions and maintain customer relationships, Moody’s noted.

But Moody’s warned that the rapid growth of private credit could attract heightened regulatory scrutiny. Namely, as these managers cast a wider net for retail investors, regulators will pay closer attention to ensure risk management oversight keeps pace with expansion, it said.

The SEC is reviewing Apollo’s ETF filing, which Moody’s noted could take time, as the regulator examines transparency, liquidity assessment rules, and governance, including who will provide valuations.

On the other hand, the Federal Reserve is expanding data collection on banks’ exposure to non-bank financial institutions, signalling a growing focus on the sector’s role in the broader economy.

“Ultimately, heightened transparency may well be an inevitable by-product of private credit’s exponential growth,” Moody’s said.

“For today’s ambitious alt asset managers, it will be increasingly critical to ensure that risk management oversight keeps pace with fast-evolving growth into more regulatory sensitive parts of the market, such as more ‘mum and pop’ retail investors”.

However, on the flip side, Moody’s said: “Too much transparency and liquidity could reduce the attractive premiums the alternative asset managers have been able to maintain”.

Back in July, Citi highlighted that in Australia, the private credit sector is emerging as a competitive threat to banks, driven by its ability to provide flexible lending solutions and attractive returns for investors, which could challenge traditional banking models.

As the market expands, Citi said Australian banks may 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 scrutiny of private markets overall, citing a lack of transparency and data.