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 fueling growth that could nearly double in size in the coming years, according to Moody’s analysts.

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

“Private credit is growing as fast as investors are pouring more funds into this space,” it said.

Buoyed by this tremendous growth, Moody's ratings highlighted that asset managers are increasingly competing to establish themselves as comprehensive financial centers serving 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 democratizing access to this asset class, targeting not only high net worth individuals net worth, but also to investors of all income levels.

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

Shortly thereafter, on September 26, Apollo announced a $25 billion private equity direct lending program with Citi that will focus on high-yield corporate lending in North America, with plans for international expansion.

"These strategic partnerships are just the latest illustration of how private lending is rapidly expanding beyond its core direct lending to middle-market corporate companies," Moody's said.

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

"Depending on the type of partnership, alternative managers can achieve much greater credit leverage at a much faster pace than an organic growth path," it said.

"Achieving scale and greater diversification will become more important as demand for capital accelerates in the global economy and clients want to do more with fewer general partners," Moody's explained, adding that bank partnerships also enable alternative asset managers to significantly increase their lending capacity while avoiding the burdensome costs of running a huge lending business.

Meanwhile, banks are also building private credit relationships, including lending to 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 rapid growth in private credit could attract increased regulatory scrutiny. Namely, as these managers cast a wider net for retail investors, regulators will pay more attention to ensure risk management oversight keeps pace with the expansion, it said.

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

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

"Ultimately, increased transparency may be an inevitable byproduct of exponential growth in private credit," Moody's said.

"For today's aspiring alternative asset managers, it will be increasingly critical to ensure that risk management oversight keeps pace with the rapid growth in more regulatory-sensitive parts of the market, such as more retail investors 'mom and pop'.

However, on the other hand, Moody's said: "Too much transparency and liquidity could reduce the attractive premiums that alternative asset managers have been able to maintain."

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

As the market expands, Citi said Australian banks could 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 in general, citing a lack of transparency and data.