Big banks and private equity giants are joining forces to create a new Wall Street supergroup with the goal of capturing a bigger slice of the $1.7 trillion private credit market.
The newly emerged team, in partnership with Citigroup (C) and Apollo Global Management (APO), on Thursday announced a $25 billion private credit fund focused on direct lending. This is the largest financing partnership ever between a private financial institution and a major bank.
“This is a win-win deal,” Apollo co-president Jim Zelter said in a press release. (Note: Apollo is the parent company of Yahoo Finance).
Viswas Raghavan, Citigroup’s head of banking and executive vice chairman, said the banking and private equity giant “offers customers a wide range of options to meet their evolving financing needs.”
The joint venture will enable Citi’s dealmakers and capital markets professionals to maintain client relationships and fees while offering private financing options. And, importantly, banks will no longer have to include the liabilities from these transactions on their balance sheets.
Private credit, which accounts for all debt not publicly issued or traded, has sharply increased over the past decade, largely due to rising interest rates and regulations that have forced banks to scale back their own leveraged lending. It is a loosely defined market that has grown.
The market is now worth about $1.7 trillion, compared to $41 billion in 2000, according to data provider Preqin. This amount is still small compared to the total loans held by U.S. banks (more than $12 trillion).
“arrangement”
Citigroup is not the only major bank to partner with private lenders to go after this market.
Earlier this month, French multinational bank BNP Paribas (BNP.PA) committed $5 billion to a “strategic partnership” focused on asset-backed institutional credit with Apollo subsidiary Atlas. In this partnership, BNP will provide the capital and Apollo will initiate the financing.
In May of this year, Pittsburgh regional bank PNC (PNC) entered into a unique agreement with asset management firm TCW.
Last November, Société Générale, another major French bank, partnered with money management company Brookfield (BAM) to launch a private debt fund that is expected to raise 10 billion euros ($11.2 billion) over the next four years. and provided credit to infrastructure providers and financial institutions. Other private market funds.
San Francisco bank Wells Fargo & Co. (WFC) took a similar approach a year ago, signing a deal to hand over customer lending opportunities to a business development company set up by asset manager CenterBridge Partners.
A branch of Wells Fargo Bank in New York City. Reuters/Gina Moon/File Photo (Reuters/Reuters)
The minimum capitalization target is $5 billion, and the fund will raise at least two-thirds of its capital from the British Columbia Pension Fund and another sovereign wealth fund owned by Abu Dhabi.
story continues
“This allows us to continue to be relevant to our customers, which we don’t intend to put on our balance sheet, but where we can provide solutions to them,” Wells Fargo Chief Financial Officer Mike Santomassimo said at the 2018 UBS conference. We have an opportunity to preserve it.” February.
“Partnership may be the wrong word, but we have an arrangement,” he added.
“Frenemy”
Despite these new alliances, the relationship between regulated banking and lending by non-bank financial companies is far from straightforward, said Joohon Kweku, a senior partner at McKinsey.
“Banks and private credit funds have had a kind of adversarial relationship for a long time,” said Kwek, who holds leadership roles in both McKinsey’s North American asset management and private equity practices.
Banks can compete with private credit groups to finance transactions. We may also sell tranches of broadly syndicated loans to the same private credit group. And in many cases, the nation’s largest banks also lend to similar groups.
Mr. Kwek highlighted both the tightening of regulations under which banks deploy their own capital and the lower leverage that private funds use when lending to borrowers, and that these formal alliances mean that private lines of credit are In fact, it is expected to continue to grow, and it shows that banks are now recognizing that. as another source of income.
Financing in this area is also likely to continue to proliferate beyond traditional financing for corporate acquisitions. Mr. Kwek and his collaborators predict that an additional $5 trillion to $6 trillion in lending will shift from banks to private credit over the next decade, ranging from financing for infrastructure projects to aircraft leasing to student loans. This includes everything from mortgage loans to loans related to high-risk commercial real estate. real estate project.
“You may be paying a hell of a lot of money.”
Even as other banks join Wall Street’s superteams, some banks still choose to go it alone in the world of private credit. Goldman Sachs (GS) has its own private credit platform within its wealth management division that allows it to source private finance deals from investment banks.
Goldman Asset Management raised more than $20 billion for a private credit fund in late May.
JPMorgan Chase (JPM) has been in talks since late last year, but has not announced a formal partnership. A few years ago, the company set aside $10 billion from its balance sheet for direct financing.
Jamie Dimon, CEO of JPMorgan Chase. (Tom Williams/CQ-Roll Call, Inc, via Getty Images) (Tom Williams, via Getty Images)
JPMorgan CEO Jamie Dimon also expressed concern about the growth of private credit, arguing that it increases the chance that risks outside the regulated banking system will go unchecked.
“I expect there will be problems,” Dimon said at the Bernstein industry conference in late May, adding that if retail investors in these funds suffer large losses, “they could pay a hell of a price.” added.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
Click here for the latest stock market news and in-depth analysis of the events that move stocks.
Read the latest financial and business news from Yahoo Finance
