These big returns make private credit an appealing business for institutions that once focused mostly on private equity, particularly when interest rates were low. Apollo, for example, now has more than $392 billion in its alternative lending business. Its affiliate, Atlas SP Partners, recently provided $1.4 billion in cash to the beleaguered bank PacWest. Blackstone has $291 billion in credit and insurance assets under management.
Private equity firms are also some of shadow banks’ biggest customers. Because regulations limit how many loans banks can keep on their books, banks have stepped back from underwriting leveraged buyouts as they struggle to sell debt that they committed before interest rates rose.
“We’ve demonstrated over time to be a reliable form of capital that’s really emerged at the forefront, as banks, in this environment at least, have retrenched,” Mark Jenkins, head of global credit at Carlyle, told DealBook.
Direct lending may get another boost as regional banks pull back, particularly in commercial real estate like office buildings, where landlords may be looking to refinance at least $1.5 trillion in mortgage contracts over the next two years, Morgan Stanley analysts estimate. America’s regional banks have accounted for about three quarters of these kinds of loans, Morgan Stanley’s research shows.
“Real estate is going to have to find a new home and I think private credit firms are a pretty large place for that,” Michael Patterson, governing partner at HPS Investment Partners, told DealBook. More broadly, he said: “Reduced credit availability for corporates, large and small, is a thing, and I think private credit is a big part of the solution.”
Direct lending at this scale has never been tested: Nearly all its decade-long growth has happened amid cheap money and outside the pressures of a recession. The industry’s opacity means it’s nearly impossible to know what fault lines exist before they break.
At the same time, shadow lenders are increasingly extending credit to firms that traditional banks won’t touch, like small and midsize enterprises. “These aren’t necessarily companies with credit ratings,” Cameron Joyce, the deputy head of research insights at Preqin, told DealBook.