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It makes perfect sense for banks to team up with private credit providers, at least on the face of it. The former have the client relationships, but struggle to lend their own money amid tightening regulatory requirements. The latter have an ever increasing pile of assets under management — $1.7tn at the last count — and are keen to deploy capital. But some tie-ups, at this stage, are better than others.
See, for instance, Lloyds’ decision to team up with credit shop Oaktree to lend money to mid-sized UK buyouts. A UK retail bank getting in on the private credit action is a sure sign that the peak has passed. But this doesn’t look like a union of titans anyway. Lloyds is a small player in leveraged lending, and tends to operate as part of a bank syndicate. Oaktree is a relative newcomer to the space. Joining forces may help but is unlikely to transform their competitive position.
This partnership also comes late to the party. Direct lending had a golden moment last year, when the syndicated loan market temporarily ground to a halt. Competition has now resumed, tightening spreads. For private credit funds, richer pickings are available in a different sort of bank tie-up.
Enter asset-backed lending, touted as the new frontier for private capital. That roughly translates as buying bank loans secured on physical assets such as homes, offices, cars or planes, or on pools of contractual cash flows such as credit card receivables. At least five partnerships on asset-based finance have been signed between banks and private credit firms over the past 12 months, says Huw van Steenis at Oliver Wyman. Blackstone has picked up $1.1bn of US credit card receivables from Barclays.
The attractions for private credit funds are clear. This is a huge market, worth perhaps $20tn thinks Apollo. Banks are increasingly looking to offload such assets, which absorb a lot of regulatory capital, particularly where they have concentrated exposure. Just by way of example, Moody’s has placed 21 US regional lenders on review for a credit downgrade, on the basis that their commercial real estate exposure amounts to more than twice their equity.
Best of all, there are not many private capital providers competing to buy these assets. Banks prefer big, established counterparties. Funds that manage insurance assets also have a clear advantage, given they can also call on a ready buyer for tranches of the loans. In private credit’s next chapter, the whales will again forge ahead of the minnows.
