Extra credit
In September last year, real estate veteran Paul Weightman (previously the founding Executive Chairman of Cromwell Property Group) began assembling a team for a new fund manager aimed at redefining the private credit landscape. The financial world was stunned on March 8th this year when more than 20 senior executives at the £304bn asset manager Barings resigned en-masse, marking one of the largest corporate raids in asset management history. Their destination was not a larger rival or a Wall Street giant, but Weightman’s Corinthia Global Management.
This event underscores the lengths that businesses will go to win a share of the booming £1.6tn private credit market. Private credit has grown so significantly that the IMF dedicated an entire chapter in its latest Global Financial Stability Report to its "rise and risks." The IMF estimates the size of the global private credit industry at just over £1.6tn, most of which is in the US, rivalling the high yield and leveraged loan markets. Additionally, the Federal Reserve Board's Financial Stability Report (FSR) published in May 2023 showed that, based on Form PF data as of Q4 2021, public and private pension funds held about 31% (£246bn) of aggregate private credit fund assets. Other private funds made up the second-largest cohort of investors at 14% (£109bn) of assets, while insurance companies and individual investors each had about 9% (£74bn).
Over the past decade, the asset class, particularly direct lending, has generated higher returns than most other comparable asset classes, including 2-4% over syndicated leveraged loans. Borrowers have been willing to pay a premium for the speed and certainty of execution, agility, and customisation that private lenders offer. Additionally, private debt funds have attracted highly leveraged borrowers that are unable to get adequate funding from heavily regulated banks. A large share of dry powder is held by the top five fund managers, suggesting disproportionately high demand for these fund managers by limited partners (LPs). The Fed estimates that the top ten U.S. private debt fund managers hold about 40-45% of all dry powder in the U.S., across all private debt strategies.
Barings ventured into the private credit industry in 1992 by establishing a private finance group and saw a significant surge in this sector after the 2008 financial crisis. Stricter regulations forced banks to retreat from lending to small and medium-sized enterprises (SMEs) across the US and Europe, creating a gap that Barings and other private credit firms filled. The resulting high single-digit returns during a prolonged period of low interest rates attracted substantial investor interest.
Private equity giants like Blackstone and Apollo expanded into corporate lending, expanding well beyond their leveraged buyout roots. Specialised groups such as HPS, Ares, as well as Barings developed sizeable private credit businesses, partly by financing private equity buyouts. In recent years, banks have sought to reclaim their presence in the market, forming partnerships with asset managers, as seen with Barclays and Wells Fargo.
The fallout from the Cornithia corporate raid has been significant. Barings’ rivals quickly moved to capitalise on the disruption, with at least two competitors considering loan refinancing offers to private equity firms previously financed by Barings. Such aggressive tactics are rare and risky, potentially leading to a run on Barings' loan portfolio as borrowers seek refinancing with other lenders. Despite initially insisting it was business as usual, Barings was forced to replace its private finance investment committees on March 11th.
This aggressive poaching tactics highlight the fierce battle for dominance in the lucrative private credit market with ongoing competitive moves. Eldridge Industries is believed to be in advanced talks to buy European private credit firm Hayfin Capital Management for more than €1.2bn. The acquisition would give Eldridge further access to the growing private credit market.
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In another significant move, Brookfield announced plans to acquire a 51% interest in Castlelake’s fee-related earnings and invest $1.5bn in the firm’s funds and strategies. Craig Noble, CEO of Brookfield Credit, stated, “the addition of their capabilities enables us to better serve our clients around the world. With growing demand from investors for diverse credit strategies, this multi-trillion market has significant tailwinds that will help drive the growth of our $300bn credit business over the next decade.”
Additionally, Blue Owl, a leading alternative asset manager, announced the creation of Blue Owl's Real Estate Finance strategy with the acquisition of Prima Capital Advisors for $170m. Prima manages approximately $10bn in assets on behalf of institutional investors and select high net worth individuals. Jesse Hom, previously global head of real estate credit at Singapore sovereign wealth fund GIC, is to join Blue Owl to lead the new platform and serve as CIO for real estate, reporting directly to Marc Zahr, co-president of Blue Owl and head of real estate. Blue Owl stated that Hom would also work to grow the existing triple-net-lease business and identify strategic opportunities to build out and scale the real estate credit platform.
The competition within the private credit market extends beyond executive poaching and strategic acquisitions to significant fundraising efforts. Goldman Sachs’ alternatives business recently announced a successful fundraise, securing over £5.6bn for its real estate credit strategies, surpassing its target. The final close of West Street Real Estate Credit Partners IV and related vehicles marks the largest fundraise to date in its series. Goldman Sachs highlighted the “significant opportunity set in real estate credit driven by major dislocations in real estate markets globally, creating attractive opportunities for alternative lending sources that can provide size and certainty of execution to borrowers.” The fund has already committed over £1.4bn across eight global investments. Richard Spencer, chief investment officer for Real Estate Credit at Goldman Sachs Alternatives, remarked, “The market for real estate credit is characterised by a material and growing supply and demand imbalance. We believe this is creating attractive opportunities for alternative lending sources that can provide size and certainty of execution to borrowers.”
Apollo Global Management is targeting €1bn for a European real estate debt strategy and The Abu Dhabi Investment Authority (ADIA) is upping its investment in Cheyne Capital’s capital solutions strategy to £650m. Mohamed Al Qubaisi, executive director of the real estate department at ADIA, emphasised the compelling nature of this investment: “We have invested with Cheyne for a number of years and welcome the opportunity to grow our relationship. We see this as a compelling investment proposition in a market that is looking to private credit lenders for capital.” This move signifies the increasing involvement of sovereign wealth funds in the £1.6tn private credit market, which has gained traction as investment banks pull back from leveraged debt due to higher capital requirements. Investors seeking higher yields have subsequently poured money into this asset class.
As the private credit market continues to attract substantial investments, aggressive competition, and significant fundraising efforts, questions arise about whether this sector has reached its peak. However, the current rise of private credit may be indicative of a broader trend shifting away from traditional bank lending. Over decades, bank lending as a proportion of total borrowing has steadily declined, with past instances of significant disintermediation, such as the 1973-74 inflation and interest rate shock, fundamentally reshaping the financial landscape.
Looking ahead, there's a plausible anticipation of another wave of bank disintermediation. History suggests that it typically takes at least two to three years for weakened banks to recover from significant interest rate shocks. While major banks may have rebounded, regional banks are likely to take longer to rebalance the interest rates on their assets and liabilities, presenting ample opportunities for private credit to step in and bridge the financing gap.
Huw van Steenis, formerly of the Bank of England and UBS wrote in an op-ed piece that what we are seeing is the re-tranching of the banking system where banks parcel the riskiest slice to private credit, providing less risky lending themselves. “Private credit could be the Ozempic to help banks on yet another diet.” Following the theme, Felix Martin in Reuters Breakingviews retorted, "even if this analysis proves accurate... it will be important to ensure that the new weight-loss plan does not starve the banks to death. With private credit, as with miracle weight-loss drugs… it is important not to exceed the stated dose."