Moody’s ratings agency recently issued a warning about the growing threat to the American economy posed by retail investors who invest in private credit assets.
Private credit firms have steadily surpassed banks in the public markets in the world’s largest economy and global credit markets since the COVID pandemic, and since their founding in 2014, they have amassed more than USD 2 trillion in assets under management, according to a report released by the rating agency. This is despite the market’s turmoil following President Donald Trump’s tariffs on China and other nations.
“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.
The increase in open-ended evergreen funds and their more lenient regulations in contrast to the conventional closed-end funds have also contributed to the acceleration of retail exposure to the expanding private credit market since the pandemic.
The use of exchange-traded funds with a private credit focus has also increased. ETFs could “redefine access to private markets,” according to Moody’s, but only with the right protections in place.
The ratings agency revealed that retail-focused ETFs and evergreen funds provide significantly more flexibility than closed-end funds in terms of taking and withdrawing investments.
According to Moody’s analysts, this independence carries risks similar to a bank run, which happened to Silicon Valley Bank and other regional banks in 2024.
“Misalignment between liquidity terms and investor expectations could impact trust in fund sponsors,” the analysts wrote.
According to Moody’s, another risk associated with evergreen fund credit agreements is the lack of strict covenants, or limitations on lenders and borrowers, in contrast to closed-end funds.
“Retail capital could significantly expand private markets, but managing liquidity and ensuring transparency will be critical to long-term success,” the report concluded.