Sector could amplify and spread economic shocks.

While Fitch Ratings doesn’t currently view the private credit sector as a systemic risk, it warns an episode of economic stress could expose it as an increasingly important channel for transmitting risk across the financial system.

Amid the rapid growth of private credit, an economic shock could cascade throughout the financial system, revealing how far a formerly niche market segment has evolved in recent years, the rating agency said in a report.

“Private credit’s pervasiveness could amplify a systemic shock and impact a wide range of investors and lenders, including pension and sovereign wealth funds, banks, insurance companies, foundations/endowments, high-net-worth individuals and increasingly, retail investors,” Fitch said.

The rise of private credit as a possible channel for spreading risk stems from its recent rapid growth, and increasing complexity — evolving from a niche product for institutional investors to an element of the mainstream financial industry.

Fitch noted that the global private credit sector had already grown to the size of the U.S. leveraged loan and high-yield bond markets, as of the start of the year, and it’s expected to grow by another US$1.1 trillion to US$2.7 trillion by 2029.

Alongside its recent growth, the sector is exhibiting “bubble-like” attributes, it said, “including rapid growth and financial innovation, spread compression, heightened competition, growing retail participation and rising borrower leverage.”

In the face of a shock — such as a sharp widening in interbank spreads, an interest rate shock, or rising margin calls — the private credit sector could face losses and/or elevated redemptions, it said.

“This could result in far-reaching consequences for capital formation, credit availability, consumer confidence/spending, social safety nets, national development, depositor stability and insurance availability,” Fitch warned.

Given these risks, the private credit sector “would benefit from increased oversight and transparency,” it said.