Private Debt News Weekly Issue #26: Banks Join the Fray as Market Eyes $30 Trillion
Partnerships Proliferate and Asset-Based Finance Takes Center Stage
This week’s Private Debt News Weekly examines significant developments in the rapidly evolving private credit market. As traditional banks increasingly partner with private credit firms, market projections suggest potential growth to $30 trillion or more.
Asset-based finance is also emerging as a key driver of this expansion, while new retail products aim to broaden investor access. From major deals and strategic hires to regulatory concerns and default risks, this edition provides a comprehensive overview of the current state and future trajectory of private lending.
As always, let me know if you have any feedback or have areas you’d like explored in more detail.
Strategic Partnerships and Market Expansion
Citigroup and Apollo Global Management announce a $25 billion private credit partnership
Five-year deal focuses on non-investment grade transactions in North America
Mubadala Investment Co. and Apollo's insurance unit Athene also participating
Citigroup's Richard Zogheb: "We can't be an ostrich and stick our head in the sand and pretend it doesn't exist."
Apollo Co-President Jim Zelter describes it as "where the industry is going"
Citigroup will earn fees for originating transactions, while Apollo and partners provide the capital
Partnership allows Citigroup to become a one-stop debt shop, offering private credit alongside syndicated debt deals
Oaktree Capital Management targets growth in Europe's private credit market
Manages $36 billion across private credit, up from $11 billion in June 2021
Recently announced a private credit partnership with Lloyds Banking Group
Eyeing new lending areas such as asset-backed finance
Nael Khatoun, MD at Oaktree, cites "significant growth in European private credit"
European transactions benefit from tighter documentation and lower leverage multiples than US counterparts
Oaktree-Lloyds partnership will provide loans of up to £175m to fund buyouts
Blackstone expands private credit efforts with key hires
Hired Aneek Mamik from Varde Partners and Chris Yonan from Jefferies
Mamik to focus on asset-based finance investments; Yonan to lead European infrastructure finance
Blackstone Credit and Insurance unit now has over $75 billion in AUM
Unit has more than 65 investment professionals
Has committed over $20 billion for deals so far in 2024
AustralianSuper expands private credit arm in New York City
Mikaël Limpalaër named Head of Americas, relocating from London
About $19 billion invested in US private markets out of $228 billion total AUM
Five senior US appointments made
Move reflects trend of Australian pension funds increasing private credit exposure
Market Growth and Projections
Blackstone predicts private credit market to reach $30 trillion
Rob Horn, global head of infrastructure and asset-based credit at BXCI: "That is roughly a $30 trillion opportunity"
Growth driven by infrastructure projects and increased pension fund participation
Current market size estimated at $1.7 trillion
Shift towards higher-quality borrowers in private credit market
Insurance companies, early investors, still only have about 3% exposure
Apollo Global Management projects $40 trillion potential market size
Expansion beyond traditional areas into auto loans and infrastructure debt
Prediction based on market expanding beyond its roots into new lending areas
BlackRock projects global private debt market to double to $3.5 trillion by 2028
Prediction made by BlackRock's head of macro credit research
Reflects growing importance of private credit in overall asset allocation strategies
Bank of America expects private credit CLO sales to reach $35 billion in 2024
25% higher than last year's record level
Growth driven by lower costs compared to bank warehouse lines
Five new managers launched CLOs in the private credit market this year
Total outstanding private credit CLOs now around $129 billion, a 70% increase over last three years
Emerging Trends and Investor Behavior
Asset-based finance gaining traction
Blackstone focusing on energy transition, renewables, digital infrastructure, and residential real estate
Plans to invest $100 billion in energy transition and renewables
Expects $1 trillion to be spent on data centers over the next five years
Finances credit cards, home improvement loans, single-family rentals, and equipment
Retail investor push in private credit
Apollo, BlackRock, Capital Group, KKR, and State Street developing private-credit ETFs and retail products
Challenges include creating liquidity for typically illiquid assets
State Street and Apollo proposing ETF with daily liquidity, mixing public and private debt
BondBloxx and Macquarie proposing ETF focused on CLO bonds as proxies for private debt
Pension and sovereign wealth funds increasing allocations
Horn suggests allocations could increase from 0-3% to 10-20% of portfolios
Shift driven by search for better returns and diversification
AustralianSuper's expansion in NYC reflects this trend
Banks partnering with private credit firms
Blackstone partnered with Barclays earlier this year
JPMorgan dedicating at least $10 billion to private credit
Wells Fargo raising a $5 billion fund with Centerbridge
Mizuho took stake in Golub Capital to distribute products in Japan
Deal Highlights
Gopher Resource secures $450 million refinancing
$420 million term loan and $30 million revolving credit facility
Led by Silver Point Finance
Proceeds used with equity investment from Energy Capital Partners to refinance existing term loan due in 2025
Centerview Partners and Latham & Watkins served as financial and legal advisers
United PF (Planet Fitness operator) in talks for $750 million debt package
Working with Evercore to refinance maturing leveraged loan
Proposed deal includes term loan and preferred equity
Aims to refinance $525 million term loan due in December 2026
S&P Global Ratings revised company's outlook to negative in April 2023
Blue Owl Capital leads $3.2 billion private debt financing for Smartsheet buyout
21 direct lenders participated, signaling high demand
Priced at 6.5 percentage points over SOFR
Includes $2.9 billion annual recurring revenue loan and $300 million revolver
Vista and Blackstone made concessions to court large group of direct lenders
Blackstone leads $2 billion private credit deal for The Fidelis Partnership
Other lenders include Oak Hill Advisors, Barings, PNC, and Barclays
Deal refinances and grows Fidelis' existing debt
Fidelis is a Bermuda-based insurance underwriter
Market Challenges and Considerations
Regulatory scrutiny increasing
IMF urging "a more intrusive supervisory and regulatory approach to private credit funds"
Concerns over growing risks in the $1.7 trillion industry
US appeals court struck down SEC efforts to increase disclosure requirements
Concerns over default rates
Jae Yoon, CIO of New York Life Investment Management, warns of potential "reckoning moment"
Points to declining recovery rates, excessive competition, and loosening covenants
Fitch Ratings reports 5% default rate in August based on analysis of 1,200 firms
Kroll Bond Rating Agency estimates 1.5% default rate in direct lending for first half of year
Liquidity mismatch in proposed retail products
Challenge in turning illiquid private loans into easily tradable fund shares
State Street and Apollo proposing daily liquidity through Apollo's commitment to repurchase private debt
Regulatory concerns over potential mismatch between asset liquidity and fund redemption terms
Competition intensifying
Shrinking "illiquidity premium" as more players enter the market
Matthieu Boulanger of HPS Investment Partners notes premium has shrunk from 350 to 100-150 basis points
Increased competition leading to looser covenants and potentially higher risks
Geographic expansion challenges
Oaktree cites Europe as a "complex landscape" with differing legal jurisdictions and languages
Higher margins in Europe reflect this complexity
Opportunities in markets where traditional banks are retreating, such as Australia and Indonesia (per PGIM CEO David Hunt)