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From global banks to alternative fund managers, more senior financiers are joining a growing chorus warning of cracks in private credit.

TCW Group Inc.’s Chief Executive Officer Katie Koch told a forum in Hong Kong on Wednesday that she’s “very nervous” about parts of private credit. Tony Yoseloff, chief investment officer of Davidson Kempner Capital Management LP, said there’s been a “race to the bottom” in terms of covenants.

Their comments come as private credit — or lending done outside the heavily regulated banking sector — has ballooned to a $1.7 trillion industry. Some banks are making conscious decisions to collaborate with private credit players to earn fees and tap ever-deeper pools of capital, while others say the combinations are risky and could infect the banking sector.

Los Angeles-based asset manager TCW is 15% underweight credit right now, Koch said at the Global Financial Leaders’ Investment Summit. Yoseloff said on a separate panel that private credit’s impact is particularly being seen in the US, and “the reality of that is, there’s been a race to the bottom in terms of the covenants that are provided, the coupons that are earned.”

They spoke a day after UBS Group AG Chairman Colm Kelleher highlighted risks in the US insurance industry, citing weak and complex regulation as private financing booms.

US life insurers have ramped up private debt investments over the past few years, allocating close to one-third of their $5.6 trillion in assets to the sector last year, up from 22% a decade ago, according to data compiled by research firm CreditSights.

Marc Rowan, CEO of Apollo Global Management Inc., shot back at Kelleher on an , saying he was “just wrong.” Apollo’s Athene Holding Ltd. insurance unit mostly uses the big three credit rating companies to assess its assets, while most of banks’ balance sheets don’t have credit ratings at all, Rowan said.

Still, Rowan agreed that risks are posed by offshore jurisdictions that don’t have the same regulatory and ratings standards as the US. “So, Colm is not wrong at this point in the credit cycle to say that there are systemic risks piling up,” he said on the call with analysts.

Chris Gradel, co-founder of PAG, told the Hong Kong forum that there are areas that need to be watched in private debt, including liquidity mismatches and funding through open-ended vehicles. In Australia, there is even financing through retail funds that can be bought and sold on a daily basis, he said.

“I’m a huge skeptic on these semi-liquid products,” said Gradel. “Managing illiquid investments in an open-ended structure is extremely difficult.”

He suggested more regulatory oversight, including of insurance firms that are funding private debt and other alternatives. Gradel added the caveat that the private debt sector “is not quite big enough yet to be really a systemic risk.”

Speaking at the forum, another Apollo executive, John Zito, co-president of the asset management arm, said the firm is reducing risk in the private credit space.

“We’re really trying to be as conservative and actually in risk reduction mode over the last 12 months,” Zito said.

Photograph: TCW Group Inc.’s CEO Katie Koch; photo credit: Hollie Adams/Bloomberg