Scaling new heights
Private credit’s meteoric rise over the past decade has not gone unnoticed. How are banks, insurance companies and asset managers shifting the asset class?
A decade ago, private credit AUM stood at just over $500 billion; by 2023, that figure had tripled to just over $1.5 trillion, according to Preqin. That’s pretty rapid growth. Yet the expectations are for much more to come – Moody’s, for example, estimates that AUM will double by 2028 to reach $3 trillion. And while much of the growth we’ve seen to date has been fuelled by the rise of independent direct lending funds that have moved up the deal size spectrum and that have largely originated their own deals, the next period looks of expansion looks set to be different. Three big trends will dominate:
Insurance companies go large. While insurers have been involved in private credit for some time, including via funds and direct investments, they are ramping up their efforts in the asset class. A Moody’s insurance company survey last year found that 80% of respondents expected to increase their allocations to at least one class of private credit over the coming years. And, based on the premise that private credit can be a strong match for their liabilities, some insurers are beefing up, building out or acquiring origination capabilities. Sun Life Financial bought 51% of Crescent Capital Group in 2021, for example, while Prudential’s PGIM acquired a majority stake in Deerpath Capital Management in 2023 and has said it is planning further expansion into the asset class via M&A.
Further, as private credit managers begin to diversify their direct lending exposure by moving into areas such as real estate and infrastructure lending, insurers are increasingly providing the long-term stable capital that these types of investment require. Recent Oliver Wyman analysis estimates that insurance capital represented 43% of credit assets under management at the top seven North American listed private markets firms in Q3 2024, up from just 32% in Q4 2021.
Insurance companies are not the only ones snapping up private credit managers – large asset managers are also on the acquisition trail. The end of last year saw BlackRock acquire HPS Investment Partners to sit alongside its $3 trillion public fixed income business and offer clients a mix of public and private investments for their portfolios. Earlier deals include Nuveen’s purchase of Arcmont Asset Management and First Sentier Investors’ acquisition of AlbaCore Capital Group, both in 2023.
There are also growing numbers of joint ventures or partnerships between asset managers and private credit firms. BlackRock and Partners Group announced such a deal in September last year to offer retail investors access to private markets (including private credit), while Brookfield Asset Management and Castlelake agreed a strategic partnership in asset-based private credit earlier in 2024.
“Our industry is consolidating, and it will continue to do so,” says Tas Hasan, Managing Partner of Deerpath Capital. “Large asset managers and insurance companies are increasingly looking to acquire established direct lending platforms rather than build capabilities from scratch.” Hasan, however, believes there is still significant growth ahead for the direct lending industry. “If you believe private equity will continue to expand, about half the funding needed for LBOs has to come from somewhere, and its not coming from the banks.”
We are seeing asset managers not already in the asset class buying up private credit shops, says Tamsin Coleman, Principal and Senior Private Debt Specialist at Mercer. We’re also seeing those with exposure acquire capability in niche areas.
This could have an even more profound effect on the private credit market as the trend accelerates. There were already some bank-private credit tie-ups in the market, but recent times have seen these increase markedly.
The retrenchment of banks from a range of lending activities has been a long-running theme, but the 2022-2023 broadly syndicated loan (BSL) market slowdown saw private credit take significant bank share at attractive spreads. "When rates initially rose in 2022 and CLO issuance stopped, it spooked a lot of the banks and they could no longer offer sponsors normal BSL execution," says Richard Miller, Chief Investment Officer at TCW Private Credit. "Private credit quickly moved in and started taking market share. This wasn’t just middle market borrowers any longer, it included larger borrowers who had been accessing the BSL market."
"When rates initially rose in 2022 and CLO issuance stopped, it spooked a lot of the banks and they could no longer offer sponsors normal BSL execution. Private credit quickly moved in and started taking market share. This wasn’t just middle market borrowers any longer, it included larger borrowers who had been accessing the BSL market."
In 2024 alone, several bank and private credit partnerships were announced. These included Oaktree and Lloyds Bank in a direct lending tie-up, and AGL Credit Management and Barclays, which aims to capitalise on the convergence of private credit, BSLs and high yield bonds.
FS Investments, Cliffwater and Shenkman Capital also announced they would be working with JP Morgan on a $10bn partnership, while Apollo and Citigroup joined forces for a $25 billion direct lending programme.
While this may be a scramble for relevance in the corporate loan sector among the banks, there are other forces at work. Many new tie-ups are designed to provide funds with origination partners for a range of new private credit products. With Basel III Endgame starting to come into force later this year, asset-backed lending is likely to require increased capital requirements for many banks.
As with the direct lending space, private credit is now filling the gap in asset-backed lending, too. Cue even more partnerships, such as the Ares and CAL Automotive joint venture for $1.5 billion asset-based finance on car leases and the Ares/AMWest partnership in the non-qualified loan segment.
As capital consolidates in the sponsor-driven private credit market, there is often overlap across private credit manager portfolios, says Miller. Private credit partnerships with commercial banks should allow investors to diversify their exposure to borrowers with a differentiated origination platform. LPs don’t necessarily need five or six sponsor-driven credit funds in their portfolios; they can now have exposure to, say, one or two, and then a broader range of diverse strategies and origination sourcing.
With mergers, acquisitions and partnerships looking set to continue apace, the private credit landscape will be fundamentally reshaped over the coming period as new credit asset classes and business models emerge. “The tie-ups between banks and private credit firms are situations where everyone can win,” says Coleman. “Firms get new origination channels and banks can cross-sell fee-based services. Add to that the joint ventures and acquisitions with asset managers and insurance companies and it’s clear that private credit is here to stay – the large players are placing big bets on this.”
