Big banks and private equity giants are joining forces to create new Wall Street super groups, with the goal of capturing a bigger slice of the $1.7 trillion private credit market.
The newest team to emerge is an alliance between Citigroup (C) and Apollo Global Management (APO), which on Thursday announced a $25 billion private credit fund focused on direct lending. It is the biggest lending partnership yet between a private financial institution and a big bank.
“This is a win-win arrangement,” Apollo Co-President Jim Zelter said in a press release. (Note: Apollo is the parent company of Yahoo Finance).
Citigroup’s head of banking and executive vice chair, Viswas Raghavan, said the bank and private equity giant will “provide clients with a range of options to meet their evolving financing needs.”
The joint venture lets Citi’s dealmakers and capital markets pros keep their client relationships and fees while offering private financing options. And crucially, it won’t require the bank to lug resulting debt from those deals onto its balance sheet.
Private credit — which accounts for all debt that is not issued or traded publicly — is a loosely defined market that mushroomed over the past decade due in large part to higher interest rates and regulation that forced banks to retrench from their own leveraged lending.
The market is now roughly $1.7 trillion compared with $41 billion in 2000, according to data provider Preqin. The sum is still small compared to the total loans held by US banks — over $12 trillion.
‘An arrangement’
Citigroup is far from the only major bank that is hooking up with a private lender to chase this market.
Earlier this month, French multinational bank BNP Paribas (BNP.PA) committed $5 billion to a “strategic collaboration” with Apollo subsidiary Atlas focusing on asset-backed institutional grade credit. In that alliance, BNP brings the capital while Apollo originates the loans.
This past May, Pittsburgh regional bank PNC (PNC) clinched its own agreement with asset manager TCW.
Last November, another big French bank, Societe Generale, struck an alliance with money manager Brookfield (BAM) to launch a private debt fund set to raise €10 billion ($11.2b) over the next four years that will supply credit to infrastructure providers and other private market funds.
San Francisco bank Wells Fargo (WFC) took a similar approach a year ago, striking an agreement to pass client financing opportunities to a business development company launched by money manager Centerbridge Partners.
With a minimum target of $5 billion in capital, the fund will get at least two-thirds of its capital from a British Columbia pension fund and another Abu Dhabi-owned sovereign wealth fund.
“What that does is give us an opportunity to still be relevant for clients where it’s not something we’re going to put on our balance sheet, but we can offer them a solution,” Wells Fargo CFO Mike Santomassimo said at a UBS conference in February.
“Partnership may be the wrong word, but we have an arrangement,” he added.
‘Frenemies’
Despite these new alliances, the relationship dynamic between regulated banking and lending by nonbank financial firms is far from simple, according to Ju-Hon Kwek, a senior partner for McKinsey.
“Banks and private credit funds have been sort of frenemies for a long, long time,” said Kwek, who sits in a leading role for both McKinsey’s North American asset management and private equity practices.
Banks can compete with private credit groups to finance deals. They also sometimes sell tranches of broadly syndicated loans to those same private credit groups. And in many cases, the country’s biggest banks are also providing credit to those same groups.
Highlighting both the increased regulatory restraint banks have on deploying their own capital and the lower leverage private funds use when lending to borrowers, Kwek pointed out that these formal partnerships demonstrate that the private credit space is indeed expected to continue growing and banks are now seeing it as another revenue streams.
The loans in that space are also likely to continue mushrooming beyond traditional financing for corporate buyouts. Over the next decade, Kwek and his collaborators expect an additional $5 to $6 trillion in loans to shift from banks to private credit, involving everything from infrastructure project financing to aircraft leasing, student loans, residential mortgages, and loans tied to higher risk commercial real estate projects.
‘There could be hell to pay’
Some banks are still choosing to go it alone in the private credit world even as others join Wall Street super teams. Goldman Sachs (GS) has its own private credit platform within its asset management division that can source private financing deals from its investment bank.
Goldman asset management raised more than $20 billion for a private credit fund in late May.
JPMorgan Chase (JPM) hasn’t announced any formal partnerships though it was in discussions as far back as late last year. A few years ago, it set $10 billion aside from its balance sheet for direct lending.
JPMorgan’s CEO Jamie Dimon is among those who have raised some concerns about private credit’s growth, arguing that it creates more opportunities to let risks outside the regulated banking system go unmonitored.
“I do expect there to be problems,” Dimon said at a Bernstein industry conference at the end of May, adding that “there could be hell to pay” if retail investors in such funds experience deep losses.
