Private credit firms are setting their sights beyond traditional corporate lending, aiming to finance a vast range of assets, from auto loans and mortgages to chip manufacturing and data centers. This ambitious expansion could potentially increase the market size by trillions of dollars.
Table Content:
- A Shift Beyond Direct Lending
- New Frontiers: Asset-Backed Finance and Infrastructure
- Tapping into Consumer Growth through Asset-Backed Finance (ABF)
- Residential Housing and Expanding Opportunities
- The Infrastructure Boom Fueled by Renewable Energy and AI
- The Future of Private Credit
- Recent Deals and Fundraising Activities in Private Credit
Apollo Global Management Inc. estimates the potential investment universe to be as large as $40 trillion, driven by a boom in private investment-grade debt related to infrastructure and asset-backed finance. These areas are expected to be the top priority for firms in the coming year, according to insights from 10 industry managers.
A Shift Beyond Direct Lending
“There is a shift in the world’s understanding that there’s a lot more beyond direct lending,” says Michael Zawadzki, global chief investment officer at Blackstone Inc.’s credit and insurance unit. “This ecosystem of private investment-grade is a massive market with a huge tailwind.”
Currently, Preqin estimates private debt assets under management at around $1.6 trillion, primarily focused on corporate debt strategies. Achieving the industry’s ambitious growth targets will require a robust consumer market and the realization of significant projections surrounding artificial intelligence. Increased competition among firms focusing on the same areas could also pose challenges.
New Frontiers: Asset-Backed Finance and Infrastructure
While the coming year will reveal the true acceleration of this push into asset-backed finance and infrastructure debt, the long-term appetite for this product shift remains to be proven. The slowdown in high-yield corporate direct lending necessitates expansion into new areas.
“The asset-backed business is probably sitting where the direct lending market was sitting five to seven years ago,” notes Dan Pietrzak, global head of private credit at KKR & Co. KKR estimates the total addressable credit market, both public and private, at approximately $40 trillion, comparable to the S&P 500’s market capitalization of around $50 trillion.
Post-Global Financial Crisis regulations have pushed banks to reduce their asset holdings, creating opportunities for private debt to gain market share. This trend is expected to persist even with potential regulatory changes.
“The fundamental model of a bank is changing from lending to earn a return to lending to make fees and attract deposits, and I don’t think that paradigm shift is changing anytime soon,” observes Loris Nazarian, assistant portfolio manager at Oaktree Capital Management’s private assets business. This shift is further fueled by investor demand for diversification within private markets and insurance companies seeking safe, high-yield investments.
Tapping into Consumer Growth through Asset-Backed Finance (ABF)
Asset-backed finance involves packaging loans or assets that generate cash flow and lending against that recurring income. This encompasses a wide spectrum, from auto loans and mortgages to music royalties and trade receivables.
The retreat of banks and credit unions from the market in 2023, following the collapse of Silicon Valley Bank, created an opening for private credit lenders in this space.
KKR projects the private asset-backed finance market to grow to $9.2 trillion by 2029, from its current level of about $6.1 trillion. They estimate that around $500 billion in additional assets will shift from banks to private funds.
“Demand from banks for that capital continues to evolve and their box continues to get more narrow,” says Greg Leveto, portfolio manager and partner at Oak Hill Advisors. This shrinking “box” of bank appetite provides significant opportunities for private credit.
ABF offers investors investment-grade equivalent loans with higher yields due to direct origination and illiquidity. This “hunt for yield” is expected to continue, with investors seeking returns exceeding those of traditional investment-grade bonds.
Residential Housing and Expanding Opportunities
Residential housing, particularly loans to consumers with strong credit, presents another promising area for private credit funds. Carlyle Group Inc. is focusing on capital pools exposed to individuals with substantial home equity, such as home equity loans, solar loans, and auto loans, citing their inflation protection. Blackstone is also looking to expand in products like home efficiency loans and residential solar financing.
Goldman Sachs Group Inc.’s asset management arm expanded its asset-backed business in 2023, targeting insurance companies and anticipating significant growth across various sectors, including financial technology, consumer credit, commercial real estate, and small business financing.
The Infrastructure Boom Fueled by Renewable Energy and AI
Infrastructure debt presents even larger opportunities, driven by the growth of renewable energy and the increasing demand for data centers to support the artificial intelligence industry. These projects require significant debt financing.
“There’s this fundamental shift in the types of investment projects that the US economy has been bankrolling and that’s creating an obvious need for capital,” states Rob Bittencourt, a partner in Apollo’s credit business.
Federal funding from initiatives like the Chips and Science Act and the Inflation Reduction Act further supports opportunities in manufacturing sectors, including semiconductors, green energy, and electric vehicles.
While banks will continue to participate in this space, they often focus on senior debt, leaving opportunities for asset managers to provide junior capital or unitranche deals. Traditional debt financing often lacks the flexibility required for new projects, creating a demand for more adaptable structures.
The Future of Private Credit
The evolving landscape of finance is driving a trend towards one-stop shops for investors, offering diverse capabilities across asset classes and capital structures. This allows investors to adapt to changing market conditions and optimize their portfolios.
“The ability to invest across everything within the credit complex is where the world is going,” Zawadzki concludes. “For people who say the golden age is over – we think it’s just the beginning.”
Recent Deals and Fundraising Activities in Private Credit
Several significant deals and fundraising activities highlight the dynamism of the private credit market:
- Deals: Blackstone’s $1.1 billion private credit deal for NSI Industries, Yotta Data Services Pvt. Ltd.’s discussions for a $500 million financing, and a €900 million debt financing package for the buyout of Synthon International Holding BV demonstrate the scale of investment in this space. Other notable deals include Databricks Inc.’s pursuit of $2.5 billion in debt, Carlyle’s over A$500 million loan for an Australian waste management firm acquisition, and a $1.43 billion loan package for Swedish property manager Odevo AB.
- Fundraising: January Capital Pte Ltd. raised over $85 million for its growth credit fund, Carlyle secured $5.7 billion for its flagship credit fund, and MA Financial Group launched a new interval fund focused on US private credit assets, indicating strong investor confidence in the sector. These activities underscore the significant capital flows into private credit strategies.
This expansion into diverse sectors signifies a transformative phase for private credit, poised for substantial growth and continued evolution in the financial landscape.
