When asked about how tighter regulations affect banks’ business models, JPMorgan Chase & Co.’s Chief Executive Officer Jamie Dimon commented that it was great news for hedge funds and private equity firms. “They’re dancing in the streets,” he said about his non-bank rivals on Friday during an earnings call with analysts.
These days, when companies want to borrow money or dealmakers need to finance a buyout, they often bypass public markets and investment banks and go straight to private lenders. Already, private credit as an asset class has grown to $1.5 trillion, bigger than high-yield corporate bonds or leveraged loans.
Some of the biggest PE firms, including Apollo Global Management Inc. and Blackstone Inc., have developed massive private-credit operations. In June, KKR & Co. agreed to purchase as much as 40 billion euro ($45 billion) of buy-now-pay-later loan receivables from PayPal Holdings Inc. for its funds. It was a watershed moment for an industry that has been keen to diversify into debt financing.
The stock market is certainly rewarding those with private-debt exposure. Shares of Apollo, where credit accounts for more than 70% of its assets, have hit an all-time high. By comparison, the stock price of Bank of America Corp., which sits at the top of the US leveraged loans league table, is languishing.
Private credit’s dance with borrowers will get only wilder as new financial regulations come out in the US. Big banks might see an average 20% increase in overall capital requirements. Non-bank lenders can encroach further as banks tighten their loan standards.
In fact, there is no reason why private credit can’t overtake the $3 trillion buyout world, PE firms’ traditional bread-and-butter business. A lot of opportunities exist.
Consider venture debt. Private credit deployments into technology, media and telecom accounted for nearly one-quarter of total deals last year, according to Deloitte LLP. In a nod to this new opportunity, BlackRock Inc. last month bought London-based Kreos Capital, a large provider of loans to startups. Meanwhile, SoftBank Group Corp., which ran the world’s biggest venture capital fund — unsuccessfully — is working on plans to become a lender, too.
Or how about real estate? As public markets’ perception sours, private lenders can step in and offer loans on their terms. For instance, Apollo’s 1 billion euro property deal with Germany’s struggling landlord Vonovia SE came with hidden, generous sweeteners, Bloomberg News reported.
Ultimately, underpinning private credit’s success is the US regulators’ lenient stance. The government does not see these shadow lenders posing any systemic risks; they are nothing like the troublesome banks.
The Federal Reserve’s Financial Stability Report in May illustrates the regulator’s attitude. The Fed noted that private-credit funds typically have a lockup period of five to 10 years and that even the most levered is not overly so. In other words, there’s nothing to see here, even as the regulator admitted that this sector was opaque and its loans’ default risk was difficult to assess.
Some might feel private credit has become a market craze that everyone — including SoftBank, which tends to be late to the game on everything from artificial intelligence to asset management — wants to jump onto. In less than a year, assets have ballooned by about $300 billion. But everything is relative. The asset class is still small when compared to the $5.4 trillion US bank loans market, for instance.
For now, everything is going in private credit’s favor. Loan demand is there because banks are pulling back, borrowing costs are staying higher for longer, the US economy is heading into a soft landing — not a recession — and most importantly, they have the regulatory green light. The future of private lending shines brightly.
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