REPORT PREVIEW:
Our global survey of 32 banks actively engaged with private credit shows an 18% average annual growth in lending to the ecosystem in 2021-23, nearly matching the rapid 19% increase in capital-raising by private credit funds over this period. Growth in loans to private credit was fastest among banks with $100-$500 billion in total assets at 26%. Expansion was more rapid in North America (23%) than Asia-Pacific (17%) or Europe (12%).
- Responding banks had $525 billion in loan commitments to private credit as of year-end 2023, but exposures are moderate relative to total loans. Private credit loan commitments were about 3.8% of total loans on average in 2023, up from 3.0% in 2021. Most of the increase was from 2021 to 2022, with a slowdown in 2023 because of funding strain on US regional banks and anticipation of heightened bank capital requirements globally. However, certain smaller banks in the sample are pursuing aggressive expansion that could raise credit risks, especially if they have less established track records in this multifaceted market or have less robust risk-management infrastructure. Relatedly, private credit commitments averaged 3.0% of total loans among banks with standalone single-a credit strength, as captured in their Baseline Credit Assessments (BCAs), but around 5.0% for banks with baa credit strength.
- Private credit exposures are mainly in asset-based lending (ABL) and subscription credit facilities (sublines). Nearly all respondents are active in secured lending to ABL facilities, with around $350 billion in total commitments (65% of aggregate), $105 billion of which is in warehouse lending facilities (20%). Subline facilities accounted for around $115 billion in commitments (22%).1 .
- Loans are most commonly extended to bankruptcy-remote vehicles secured by middle market direct loans. These structures account for around 37% of commitments, followed by funds managed by private credit managers (18%), real estate investment trusts (8%) and business development companies (7%). The remaining 30% of loans are extended to other vehicles2 .
- Sector and risk are concentrated, with a few of the largest private credit managers accounting for significant parts of the asset class pool. Banks' generally prudent risk appetite means they will normally lend to large, well-established private credit managers. Correspondingly, banks on average lend to just 20 private credit clients.
- Well-structured collateral helps mitigate high leverage typical of middle market loans. Surveyed banks' loans are generally secured by first lien loans to middle market borrowers (49%) and large corporates (9%), or by the uncalled capital commitments of investors in private credit funds (27%).