“Private Credit” 2.0

Wall Street’s magic is in finding new ways to make money. Although we talk a lot about the surge in private credit in this newsletter, I’ll steal a line from Marc Rowan, the chief executive officer of Apollo Global Management: “We actually have no idea what the words ‘private credit’ mean. They’re just two words that will follow each other.”

Asset-backed lending, middle-market debt, insurance-related transactions, loans tied to recurring revenue on everything from software to music royalties—that mash-up of financial jargon describes just a small smattering of the bespoke ways finance giants are maneuvering to expand on a roughly $1.7 trillion market.

What Rowan was getting at is that we use “private credit” as a monolith, and he’s right. But within that space there’s a lot of change, and the largest players are making big moves to compete.

One of the more prominent businesses in the industry is lending private funds for private-equity-fueled buyouts.

Peter Gleysteen, who earlier in his career worked with the legendary, late JPMorgan dealmaker Jimmy Lee in the creation of the leveraged loan market, sees such lending as an evolution. The firm he founded in 2019, AGL Credit Management, struck a deal this week with banking giant Barclays PLC to start up AGL Private Credit.

Gleysteen, after Bloomberg broke news of the deal several months ago, explained the move to us in a television interview. “They have hundreds and hundreds of bankers covering multiple clients with a special focus on private equity firms, so, first, that’s an incredible sourcing aperture,” he said. “Second, we’ll be deeply integrated inside of Barclays.”

The inclination of big banks to tap the private-credit money engine has sped up in the past year. Goldman Sachs’ asset manager has raised billions for its private-credit engine. JPMorgan Chase & Co. has its own form of the strategy, committing its balance sheet to the cause.

As Gleysteen points out: “Banks have been encumbered to offer what we know as a private-credit solution, which has typically a little more leverage than a bank-regulated, syndicated loan would be.”

Now there’s an “If you can’t beat them, join them” mentality. Meanwhile, leveraged loan markets, which often compete with private-credit funds, are coming back. That leads to the question of whether the competition will ultimately compress returns.

But as the world de-banks, and large traditional lenders face more handicaps from regulation, there are plenty of other parts of the lending markets that these “private-credit” funds can flow into. (Refer back to the word salad of "bespoke" investments above.)

“Everything is a lot more competitive,” Bennett Goodman, who co-founded the private-credit business that formed the lending arms of Blackstone, told us in an exclusive television interview this week. Goodman co-founded a new firm, Hunter Point, that just raised more than $3.3 billion to invest in upstarts, including private-credit firms.

“There are lot of people doing direct lending these days. However, it’s a good area,” he said. “It might be harder to start something new.”

Many upstarts are finding work outside of big-ticket mergers and looking to boost lending to smaller firms. This is the middle-market play. “We see less influence from the broadly syndicated markets,” says Aaron Kless, who works at Andalusian, a private-credit firm backed by billionaire David Tepper. And as regional banks step back from certain markets, funds like Kless’ are hustling to move in at a greater scale.

Then there’s the insurance play. Blue Owl this week announced a deal to buy Kuvare Asset Management, giving it access to insurance-related funds. As Bloomberg Opinion’s Matt Levine puts it:

In the olden days, buying debt at an insurance company and holding it to maturity was sleepy and boring. Now one of Wall Street’s fastest-growing firms wants to do it because it is one of the hottest corners of finance.

Amid all the big moves and excitement about this space, there are some damning realities, too. Although some fund managers are handing back double-digit returns, new research shows that the returns, by and large, aren’t so stunning when you account for the level of risk and the fees charged to investors.

“It’s not a panacea for investors where they can earn 15% risk-free,” Michael Weisbach, one of the authors to the paper released by the National Bureau of Economic Research, told Bloomberg this week. “Once you adjust for the risk, they basically are getting the amount they deserve, but no more.”

More on Wall Street

• David Solomon and Harvey Schwartz were once competing in the race to become Goldman's CEO. One year into the job at Carlyle now, Schwartz scored pay packages worth more than $200 million as CEO. (Solomon at Goldman had awards valued at just under $190 million over the past six years). Bloomberg's Sridhar Natarajan and Dawn Lim report on a new era for Wall Street pay, where private equity titans have seen massive compensation awards in recent years.
• Schonfeld looks to rebound. It was the best-performing multi-strategy hedge fund in the first quarter, while Citadel made money at every one of its primary strategies. Outside of that world, stockpicking funds are also coming back into vogue, attracting the best net flows in roughly two years.
• In case you missed it, here's a look inside of Bridgewater and the challenge ahead for Ray Dalio's successor, Nir Bar Dea, via Bloomberg's Katherine Burton.
• And an interview with John Paulson, by Bloomberg's Amanda Gordon, ahead of a $814,600-a-head fundraiser for Donald Trump in Palm Beach, Florida.

More to come. To read this newsletter online for Bw Daily, you can do that here. Next week, we'll be speaking with the top economist at Citadel in an exclusive interview for our Bloomberg Television "Invest" series, ahead of our summer event. He'll be on Tuesday during the noon hour. We'll also be bringing you live analysis as the biggest US banks report first quarter results on Friday. Tune in, send questions, and all tips and opinions to [email protected].