The private credit industry is booming, helped by the relatively high interest rates and tight regulations by American and European regulators. Data by Bloomberg shows that the industry has grown to attract over $1.7 trillion in assets.
This growth has led to a substantial jump in some of the biggest players in the industry. As shown below, the S&P 500 index has jumped by 26% in the last 12 months. In the same period, Ares Management has risen by 39.8% while KKR, Blackstone, Apollo Global Management, Blue Owl, and Carlyle have all jumped by over 26%.
What is the private credit industry?
Private credit is an industry where asset management companies raise money and then extend it to other firms. In most cases, these funds are raised by companies in the private equity industry.
Private credit has grown in the past few years because of the strict financial requirements to banks by financial regulators. This growth started after the Global Financial Crisis (GFC) when Wall Street banks like Wells Fargo, Merryl Lynch, and Lehman Brothers were accused of offering risky loans to individuals and companies.
Now, big American banks are required to undergo annual stress tests and ensure that they have strong balance sheets. These regulations increased last year following the collapse of banks like First Republic and Silicon Valley Bank.
As a result, banks are afraid to extend financing to many companies. In their place, private equity companies have come in and created funds that offer loans to these companies.
Some large companies in Wall Street have also created private credit funds. The most notable was Goldman Sachs, which raised $20 billion in May for private lending. Most recently, UK-listed Intermediate Capital Group raised $16.8 billion for its European direct lending fund while Ares raised $34 billion in July.
After raising funds, these companies work with other firms, often midsize ones, to extend loans to them. They then make their profits through the interest rate they charge these companies. Recently, these interest rates have been relatively strong because the Fed and other central banks have hiked rates to their multi-decade high. This is changing as the Fed is expected to start cutting rates.
Top winners in private credit
The most recent data shows that the biggest companies in the private equity industry have become the top winners in the private credit industry.
While Apollo Global Management is known as a private equity company, the reality is that it is mostly a private credit firm. Apollo’s private credit business has over $502 billion in assets while its private equity has $105 billion. In it, the company offers solutions like multi-asset credit, direct lending, asset-backed, and opportunistic.
Blackstone has also attracted over $418 billion in private credit and insurance assets, higher than the $145 billion in its private equity industry. Ares has over $250 billion of its $445 billion in assets in private credit while KKR has over $237 billion in assets.
These numbers mean that large companies are at a better position to succeed in the private credit industry than the smaller ones because they offer a one-stop-shop to their portfolio companies. This explains why some smaller firms like Polen Capital and Fidelity International halted their recent fundraisings. In a note to Bloomberg, Rob Seminara of Apollo said:
“If you want to talk to the biggest companies then you need the biggest pockets of capital. We will continue to see bigger managers grow in scale as they’re much more relevant to the biggest companies in the world. Private credit is a real enabler to them.”
The future of private credit
Analysts believe that the private credit has a bright future as regulations in the banking industry remain.
However, there are several risks that could affect the industry. For one, the amount of money raised in private credit funds this year stood at over $90.9 billion in assets this year, down from over $98.9 billion in the same period last year.
That slowdown is likely because many of the biggest players still have a lot of dry powder, with Blackstone having over $37 billion in uninvested private credit cash. As such, investors are afraid of continuing making these investments at a time when packing the cash in government bonds is yielding over 4%.
There is also rising concern about the lack of enough regulations in the private credit industry. One area that has been of concern has been how these firms value the companies that they invest in. As such, there are concerns about the potential bubble in the private credit industry.
Additionally, some analysts caution about the intersection of private credit and insurance. A good example of this is Apollo, which also owns Athene, a company that provides insurance solutions like annuities. In its case, the company provides private credit to companies and then Athene invests policyholders cash into these products. As such, if something went wrong, these companies’ insurance products may find themselves in more problems.
Other large private equity companies have a big stake in the insurance industry. KKR owns Global Atlantic, which it bought in the past few years. It bought the remaining stake in the company for $2.7 billion while Blackstone owns Corebridge Financial.
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