Recent media reports suggest that the private equity and private credit industry are lobbying for greater access to broad pools of capital it has not historically been allowed to tap, including retirement savings.
In light of this news, two Moody’s Ratings reports from 2024 speak to the opportunities this present to the private credit industry and also emerging risks.
Individual investors are increasingly driving growth in private markets, but this trend brings significant risks that need to be managed.
“Expanding into private wealth fundraising will be crucial for the industry’s continued growth. Expansion of retail private debt asset under management (AUM) has accelerated in recent years and, although still proportionally small at less than 20% of total private debt AUM, it is growing at a faster pace than institutional AUM. We expect this trend to continue, with other private asset classes likely to follow a similar pattern,” wrote the author Alexandra Aspioti, a Vice President of the private credit team of Moody’s Ratings.
“As competition among asset managers intensifies, potentially leading to lower returns, managers might increase their risk appetite. For example, private credit lenders might seek to extend loans to riskier market segments, which could result in increased losses over time. The historical returns reported by private equity and private credit funds may not serve as reliable indicators of future performance. As market conditions continue to tighten, private equity funds have encountered difficulties exiting investments. Meanwhile, private credit, though benefiting from higher rates, will likely face challenges because of mounting pressure on underlying companies. Although more sophisticated investors typically understand such risks, the more vulnerable retail segment will require further education,” she added.
What’s happening:
• Growth: Private markets are becoming more accessible to individual investors, supported by innovation and technology.
• Benefits: These investors are attracted to private assets for their inflation resistance, lower volatility, and higher yields compared to public markets.
• Risks: The influx of retail capital introduces operational complexities and potential risks if not managed properly.
Why it matters:
• For Managers: Alternative asset managers are diversifying their fundraising sources as institutional capital flows slow down. But opening these assets to a broader set of investors introduces significant operational complexities for alternative asset managers. Providers of private market funds will need to invest heavily in resources and will face a new set of risks. These risks stem from the inherently complex nature of selling financial products to individual investors.
• For Investors: Individual investors are seeking better returns and diversification, but they need to be aware of the complexities and risks involved.
• Regulation: Increased regulation is anticipated to protect investors and ensure market stability.
