REPORT PREVIEW:
In recent months private credit has continued its rapid transformation, with news of private credit ETF filings and the largest partnership between a bank and asset manager yet. On 10 September, subsidiaries of Apollo Global Management, Inc. (A2 stable) and State Street Corp. (A1 negative) announced plans for a private credit exchange-traded fund (ETF), which was filed with the US Securities and Exchange Commission (SEC). The ETF will track public and private credit investments and include individuals of any income. Apollo also landed a $25 billion partnership with Citigroup Inc. (A3 stable), which will focus on providing high-yield direct lending to corporates. Even if some ventures do not come to fruition as planned, new asset classes and investors will continue to drive an expanding private credit universe.
- Partnerships are fueling quest to become one-stop financial shop. Achieving scale and diversification is becoming more important as capital demand accelerates. Asset managers are vying to become large one-stop financial shops with offerings for everyone from retail investors to sovereign wealth funds. Banks are also building out relationships with private credit, including lending to the alternative asset managers and their funds. In a recent survey of 32 banks globally , we found that the surveyed banks' funded loans to private credit increased about 18% annually, on average, between 2021 and 2023, compared with just 6% annual growth in total loans
- Direct lending competition will intensify. More highly leveraged companies continue to turn to direct lenders even for very large deals, because larger lenders can now fund them. Borrowers reap the benefits from pursuing both public and private financing options; tighter pricing and more flexible credit protections in loan agreements. Still we believe some direct lenders still get modestly better pricing and tighter documentation, and appreciably better for smaller transactions. During 2023, high interest rates tempered collateralized loan obligation (CLO) investors' risk tolerance. Direct lenders stepped in and refinanced an increasing number of lower rated leveraged loans. In 2024, as risk aversion diminished, especially with lower rates on the horizon, many of those loans returned to the broadly syndicated loan (BSL) market.
- Rapid growth could lead to heightened regulatory attention. As the size of the private credit market grows, more regulatory scrutiny is likely to follow. So far, private credit has largely been left to monitor its own risks given that it remains a less regulated market. Asset managers are casting a broader net, capturing less sophisticated retail investors. For today's ambitious alternative asset managers, it will be increasingly critical to ensure that risk management oversight keeps pace with growth into parts of the market more sensitive to regulation, such as individual retail investors.