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

lending beyond its traditional market presents potential future

risks to the U.S. economy due to lack of oversight and

transparency, according to a new Moody's Ratings report.

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.

Moody's and regulators have highlighted 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.

A previous Moody's report emphasized the risks posed by

increasingly popular private credit evergreen funds - which

allow investors to withdraw a certain percentage of their

commitments at any time. If too many investors withdraw, asset

managers could run short on liquidity if and when they need it,

according to Moody's.

Private credit firms have also looked to grow through

purchases of insurance companies, giving private lenders

additional assets under management, Moody's said.

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 Moody's report.

Lack of transparency remains one of the greatest challenges

posed by the market, according to Moody's. 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,"

the Moody's report noted.

Efforts persist on other fronts to address private credit's

risk, including the National Association of Insurance

Commissioners' work on rule changes which would require insurers

to increase their risk capital for certain equity holdings.