“Once niche sponsors of leveraged buyouts, they have evolved into large scale asset management platforms managing capital across a variety of asset classes including private equity, real estate, credit and real assets,” Moody’s said.
In particular, the private credit businesses at the big alt managers — Apollo, Blackstone, Carlyle and KKR — have grown at a 23% compound annual growth rate over the past 10 years, it said.
This growth has made private credit their largest business segment at 41% of assets, up from 24% in 2011.
The strong growth in private credit has come alongside similar growth in private equity AUM, Moody’s reported, adding that the widespread use of leverage by private equity funds has, in turn, helped drive the rise in private credit.
“Private equity and private credit AUM have expanded in tandem in the past decade,” the report said, “driven by investors’ increasing appetite for alternatives to public equity and debt.”
At the same time, the report noted that the rapid growth in private credit has potential systemic implications.
“The growth of private markets has increased overall leverage in the financial system,” Moody’s said. “Competition in private credit has led to deterioration in covenant quality, and alternative asset managers often finance deals of other alternative asset managers, which concentrates risk.”
Additionally, as private lending is largely opaque, asset quality risks are growing, which “may be hard for market participants and regulators to discern until it is too late to counteract.”