Moody’s warns of risk posed by rising retail exposure to private credit

By Matt Tracy

(Reuters) -Moody’s ratings agency warned on Wednesday of the rising risk that retail investors, who put their money into private credit assets, pose to the U.S. economy.

Since the pandemic, the share of U.S. and global credit markets has gradually shifted from banks in the public markets to private credit firms, growing to hold over $2 trillion in assets under management since their inception in 2014, according to a Wednesday report by Moody’s.

This comes even amid the tumult that has shaken the market since President Donald Trump imposed tariffs on China and other countries.

“Even as market volatility persists, alternative asset managers have continued to launch funds aimed at drawing retail investors into private credit and other types of private assets,” Moody’s analysts wrote on Wednesday.

Retail exposure to the growing private credit space has also accelerated since the pandemic, led by a rise in open-ended evergreen funds and their looser restrictions compared to the traditional closed-end funds.

Exchange-traded funds focused on private credit have also grown in popularity. Moody’s highlighted this rise in ETFs could “redefine access to private markets” but only with appropriate safeguards.

Retail-focused ETFs and evergreen funds offer far greater flexibility than closed-end funds when it comes to accepting and redeeming investments, the ratings agency noted.

Moody’s analysts noted this freedom comes with risks akin to a run on a bank, which Silicon Valley Bank and other regional banks experienced last year.

“Misalignment between liquidity terms and investor expectations could impact trust in fund sponsors,” the analysts wrote.

Risks also stem from the loose covenants, or restrictions on lenders and borrowers, in evergreen fund credit agreements relative to closed-end funds, Moody’s noted.

“Retail capital could significantly expand private markets, but managing liquidity and ensuring transparency will be critical to long-term success,” it said.

(Reporting by Matt Tracy; editing by Diane Craft)