Moody's: The increasing exposure of retail investors to private credit will bring risks.

Credit rating agency Moody's warned on Wednesday that the risks posed to the US economy by retail investors putting their money into private credit assets are rising. According to a report by Moody's on Wednesday, since the pandemic, the share of the US and global credit markets has gradually shifted from banks in the public markets to private credit companies with the assets managed by these private credit companies growing to over $2 trillion since 2014. Even after the market turmoil caused by President Trump's large-scale tariffs, this trend continues. Moody's analysts stated, "Even as market volatility persists, alternative asset management firms continue to launch funds aimed at attracting retail investors to invest in private credit and other types of private assets." Since the pandemic, retail investors' exposure to the expanding private credit sector has also been rapidly increasing, primarily due to the rise of open-end perpetual funds, which have fewer restrictions compared to traditional closed-end funds. Exchange-traded funds (ETFs) focused on private credit are also becoming increasingly popular. Moody's noted that the rise of these ETFs could "redefine the channels for entry into the private markets," provided appropriate safeguards are in place. Moody's pointed out that compared to closed-end funds, ETFs and perpetual funds aimed at retail investors provide greater flexibility in accepting and redeeming investments. However, Moody's analysts noted that this flexibility brings risks similar to bank runs, as mismatched expectations between liquidity terms and investor expectations could affect investors' trust in the fund sponsors, as experienced by Silicon Valley Bank and other regional banks last year. Moody's also highlighted that compared to closed-end funds, the credit agreements in perpetual funds have looser restrictions between lenders and borrowers, posing risks. "Retail funds may significantly expand the size of the private markets, but liquidity management and transparency safeguards will be key to long-term success".