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As banks scale back lending amid tighter financial and regulatory conditions, alternative investment managers are poised to capitalize on the rush to private credit, says Fitch Ratings.

In a new report, the rating agency said borrowers are increasingly turning to private debt, which benefits alt fund managers.

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“Private lenders have been an increasingly important source of debt capital since the great financial crisis, which accelerated during the pandemic when traditional channels were closed,” Fitch said.

As a result, it reported that assets under management at North America-focused private credit funds jumped from US$242.7 billion in 2010 to US$932.9 billion by the third quarter of 2022.

“This trend has been furthered by the regional bank retrenchment since last fall,” Fitch said. “Private credit has been taking share as public credit markets sold off and banks took balance sheet losses and shied away from committed financings.”

Fitch noted that banks have also been conserving capital and disposing of “non-strategic” loan portfolios in anticipation of rising capital requirements in the U.S. Funds are raising money to lend to consumer financing companies that have seen traditional funding sources, such as regional banks, pull back.

In the second quarter, as global demand for private credit rebounded, 34 new funds raised US$71.2 billion, which was more than double the first quarter level, Fitch said.

The $1.5-trillion private credit market has become more diversified and is somewhat insulated from the effect of rising rates as it largely involves floating rate-loans, the report noted. “That said, private credit funds remain susceptible to the influence of credit spreads on valuation and the impact of higher borrowing costs on credit quality.”

In the second quarter, the default rate for private credit loans slipped to 1.64%, down from 2.15% in the first quarter, Fitch reported. Credit quality indicators are within ratings expectations for most of the funds managed by alt managers, it noted.