Private credit blooms from mid-market to real-economy financier
A POWERFUL shift is underway in credit markets, as private lenders partner with banks to finance real-economy assets.
The investor base has also evolved alongside the growth of private-credit markets, expanding from liability-driven insurance funds to pension capital and sovereign wealth funds to individual investors.
This long-term secular trend has helped private-credit markets expand rapidly, but we believe that we’re still in its early innings. In our view, there’s a US$25 trillion-plus opportunity ahead that can continue to drive tremendous growth and opportunity for our clients.
Real-economy opportunity knocks
To better understand the opportunity, let’s look back at its evolution. The first phase started with corporate direct lending, where lenders financed smaller, middle-market companies. In 2006, that market totalled just US$100 billion.
Since then, a virtuous circle emerged. Growth in direct lending led to bigger deals, which led to greater growth and today’s global direct-lending market, a US$1 trillion non-investment-grade market capable of financing transactions over US$5 billion. This market’s value proposition – speed of close, structural flexibility, certainty of terms and confidentiality – is increasingly apparent to the private-equity sponsor community.
Periods of dislocation only reinforced this awareness, including Russia’s war in Ukraine and the regional bank crisis and capital market dislocation in 2023. Private capital financed 86 per cent of leverated buyout transactions in 2023, up from 65 per cent in 2021.
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The next phase is just getting started. The accelerating shift to private credit has led to increasing partnerships with banks. These mutually beneficial partnerships enable banks to continue originating assets and serving their customers, and they give us the opportunity to provide clients with high-quality loans. Importantly, an even broader base of borrowers has ongoing access to financing with the same private-credit hallmarks, including speed, flexibility and certainty of terms.
A good example of the symbiotic nature of these partnerships is our recent forward flow origination arrangement with KeyCorp’s Specialty Finance Lending group, a leading asset-based lender serving clients nationally across the middle-market, growth capital, transportation and equipment sectors.
For this next phase, the combination of higher base rates, the shift from banks to private lenders, and the proliferation of strategies to access private credit creates an opportunity that exceeds US$25 trillion. Private investment-grade strategies, including asset-based financing and infrastructure, are particularly compelling.
The strategies span our high-conviction themes, including digital infrastructure, energy transition and global housing sectors that require large-scale capital to fuel the significant growth underway. For example, within digital infrastructure, we believe ongoing capital formation, mostly investment-grade, will finance growth in demand for data centres driven by cloud adoption and the AI revolution. Current expectations suggest roughly US$2 trillion of capital expenditure requirements both inside and outside the US to build and facilitate new data centres over the next five years.
Private credit advantage for investors
The investor base has also evolved, and this is facilitating the movement of assets from bank balance sheets, which are levered and funded by short-duration deposits, to the end-account holders, who want to hold these assets for life against their long-duration liabilities.
We believe there are clear advantages for investors. Direct origination via a private lender means less intermediation, bringing investors closer to the asset, which in turn results in a better yield for the same or lower risk.
The economics of private capital are compelling. Currently, direct lending generates double-digit yields on roughly 50 per cent loan-to-value loans, with around 300 basis points of excess yield compared to public loans. And in private high-grade, we have generated about 200 bps of excess spread to corporates on origination activity year to date.
From an asset-allocation perspective, these assets offer diversification to traditional corporate credit, with reduced volatility and low correlation. We anticipate increasing demand for multi-asset credit from institutional accounts so that they can potentially capitalise on opportunities across the broad spectrum.
The writer is global head, Blackstone Credit & Insurance