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Private Credit — Impact On Banks And Asset Managers
How investor behavior is shaping private credit
By Huw van Steenis
 // . //  Insights //  Private Credit — Impact On Banks And Asset Managers
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Twice a year, Oliver Wyman vice chair Huw van Steenis produces a presentation
for clients exploring major strategic and investor trends in finance. This
particular installment, based on a speech he gave at a recent investor
conference, delves into private credit’s next act — and the implications for
banks and traditional asset managers. Here, some highlights from the
presentation (you can download the full presentation below):


A NEW ERA OF GROWTH — PRIVATE CREDIT 2.0

The private credit sector is set for significant growth, especially in
asset-based lending, as it adapts to shifting investment allocations.

Speciality finance lending looks to be a promising new seam for private credit
companies to mine. The market, worth $5.5 trillion in the United States alone
based on our estimates, includes equipment leases, trade finance, and royalty
agreements. The attraction: greater diversification, as well as the specialist
skills required to understand these money flows. Private credit currently has
less than 5% of these types of loans.


BANK-PRIVATE CREDIT PARTNERSHIPS ARE A NEW SOURCE OF GROWTH

Already 14 major banks have formed partnerships with private credit firms to
distribute their loans in the past year — up from two the year before, according
to our estimates. Banks around the world are under pressure from a range of new
regulations such as new capital requirements, driving another wave of
disintermediation. 

Now they are slicing up risk in the banking system and re-distributing it: They
parcel out the riskiest portions of debt to private credit funds, retaining less
risky parts themselves. As new bank rules become clearer, teams will adjust. The
flurry of partnerships and risk-transfer deals in recent months is likely to
accelerate.


THE NEXT WAVE OF DISINTERMEDIATION OF BANKS BY MARKETS IS AFOOT

The shift of lending away from banks has a long history. Astonishingly, bank
lending as a share of total borrowing has been falling for 50 years. The 1973-74
inflation and interest rate shock created more profound disintermediation from
banks than the rise of private credit today, as investment-grade companies
switched to borrowing from the market via commercial paper and bonds. 

The rise of high-yield bonds in the 1980s was another large wave, as were the
various advances in securitization, each enabling more borrowers to bypass
banks. And since 2008, mid-market corporates and mortgage borrowing have
increasingly moved away from banks. In all, banks’ share of private lending in
the US economy has fallen from 60% in 1970 to 35% last year, according to a new
National Bureau of Economic Research paper. 


THE BARBELL EFFECT IS COMING TO BOND MARKETS

The “barbell” long associated with equity investing is now playing out in the
bond markets in earnest. This shift underscores just how much the market
structure of finance is changing. Investor flows are polarizing between low-cost
passive funds and specialized alternative asset managers. Investors have poured
nearly $190 billion into US fixed-income exchange-traded funds this year to
August, according to Morningstar, 50% more than this time last year. Last month
Ares raised the largest private credit fund in history, at $34 billion.

The top six listed alternative players experienced a whopping 21% net new flows
into their credit strategies in the year to June 2024, compared with just 1% for
all traditional firms, according to Oliver Wyman estimates.

The barbell that has already tolled for equities is now coming in earnest for
fixed income: Two-thirds of the market capitalization of listed asset managers
are now represented by the value of alternative firms, up from 4% in 2010.


CAMBRIAN EXPLOSION IN NEW HYBRID FIXED-INCOME FUNDS

The pressure is also prompting a Cambrian explosion of innovation in new
fixed-income products. The tie up between KKR and Capital Group to create one of
the first public-private fixed-income funds, and the partnership between
BlackRock and Partners Group to create blended private markets portfolios, are
critical to watch. Another is the intriguing agreement between Apollo and State
Street Global Investors to create a hybrid ETF fund to invest in both public and
private credit. These mark significant bets on the mainstreaming of private
credit. 

> 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
> Huw van Steenis, Vice Chair, Oliver Wyman

 

Download The Presentation
Private Credit's Next Act
Download
 * Financial Services
 * Insurance and Asset Management

Author
 * Huw van Steenis


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The Barbell Tolls For Fixed Income Investing

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