July 11 (Reuters) - The rapid growth of private credit

lending beyond its traditional market highlights its opaque

nature and potential concerns among regulators about its future

risks to the U.S. economy, according to a new Moody's Ratings

report that cites regulators and industry bodies.

Banks in recent years have experienced a rise in competition

from private credit lenders: non-bank firms offering

non-publicly traded debt mainly to mid-sized corporate

borrowers.

Pushed by increasing demand from investors, private credit

lenders have recently branched out into alternative lending

opportunities outside of this middle-market base such as

asset-based financing, Moody's said in a report published

Thursday.

Private credit lenders have recently seen revived

competition for financing from banks, which are the traditional

lenders for leveraged buyouts and the middle-market.

PitchBook LCD data shows that banks this year through

mid-May have refinanced $14 billion of debt previously provided

by private lenders. Banks also provided $44 billion of leveraged

loans for M&A deals through May 15, roughly twice what they

financed over the same period last year, according to Pitchbook.

This has in turn eaten into returns on these investments for

private credit investors, leading lenders to find new

opportunities such as investment-grade asset-based financings.

"This highly diverse asset class - supported by far-ranging

cash flows from receivables and leases - dwarfs growth potential

for middle market lending," wrote Moody's analysts, noting that

banks have begun handing over their consumer loan portfolios to

these asset managers.

The International Monetary Fund recently highlighted the

potential risks posed by private credit's growth. "While we do

not see immediate red flags, we do worry that this asset class

could become riskier as it expands in size," the IMF wrote in

its April Global Financial Stability report.

Moody's cited regulators' concerns that this "new era" of

private credit growth poses a "growing interlinkage of risks,"

according to the report, especially as more banks and insurers

partner with private credit lenders or participate in their

fundraising.

Four of the largest publicly-traded alternative asset

managers with private credit arms - Blackstone, KKR

, Apollo and Carlyle - grew their credit

assets under management to $1.3 trillion in the first quarter of

2024 from just $481 billion in the fourth quarter of 2019,

according to the report.

Lack of transparency remains one of the greatest challenges

posed by the market. On June 5, a U.S. appeals court vacated an

SEC rule that would have provided more information to private

investors. The recent ruling "suggests that enhanced regulatory

oversight of the private fund industry may be a distance off,"

Moody's noted.

After Reuters published a story on the Moody's report, the

credit rating agency emailed to add that its report primarily

underscores the opacity of the private credit market and cites

the opinions of third-parties about risks this poses.