Moody’s has predicted rapid growth in the private credit market in the year ahead, with expectations that the private credit sector will be worth $3tn (£2.43bn) by 2028.
This growth will be driven by lower interest rates, declining default risk and solid economic strength, led by the US and Europe, the ratings agency said.
In its latest outlook piece, Moody’s highlighted the asset-backed financing (ABF) market as being primed for growth, due to soaring demand for financing. Additionally, there is a push for greater penetration of wealth channels and the broader retail market which will likely benefit the ABF segment, the firm said.
Read more: What does 2025 have in store for the private credit markets?
“Alternative asset managers have expanded beyond corporate direct lending into the ABF market, seeking more attractive risk-adjusted returns,” said Christina Padgett, an associate managing director with Moody’s private credit team.
“Insurers have shown a willingness to sacrifice liquidity to achieve better returns for equivalent investment-grade risk.
“Over the next five years, we expect at least $1tn in specialty finance private credit ABF origination.”
Moody’s has also predicted that 2025 will see a surge in deals, creating opportunities for direct lenders to make use of $300bn of dry powder.
The firm expects to see more bank partnerships in the year ahead, citing Goldman Sachs as an example of a banking institution which is scaling up its private credit investment capabilities within their asset management businesses.
Moody’s also believes that the demand for securitised financing will grow, with total outstanding private asset-backed securities potentially reaching $500bn within the next five years. This will coincide with an expansion of the retail investor market.
Read more: ABF an “evolutionary step” for private debt investors
Retail private debt assets under management (AUM) represent less than 20 per cent of total private debt AUM at the moment, but Moody’s noted that this share is growing at a faster pace than institutional AUM.
“This is happening as alternative asset managers look beyond the traditional base of high-net-worth individuals toward the ‘mass affluent’,” Moody’s said.
“To access this newer base, some managers are offering first-ever private credit exchange traded funds (ETFs), while in Europe asset managers are adapting to recent regulation – ELTIF 2.0.”
However, the ratings agency warned of liquidity mismatches and underperformance during market stress, as two of the key risks that retail investors should be aware of.
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