Wall Street is forming super teams to fight for the $1.7 trillion private credit market

Big banks and private equity giants are joining forces to create new Wall Street supergroups, aiming to capture a bigger slice of the $1.7 trillion private credit market.

The newest team to emerge is an alliance between Citigroup ( C ) and Apollo Global Management ( APO ), which on Thursday announced a $25 billion private credit fund focused on direct lending. It is the largest lending partnership between a private financial institution and a major bank.

“This is a win-win arrangement,” Apollo co-chairman Jim Zelter said in a news release. (Note: Apollo is the parent company of Yahoo Finance).

Citigroup’s head of banking and executive vice president Viswas Raghavan said the banking and private equity giant will “offer clients a wide range of options to meet their evolving financing needs.”

The joint venture allows Citi’s deal agents and capital markets professionals to retain their client relationships and commissions while providing private financing options. And crucially, it will not require the bank to bring the debt resulting from these transactions onto its balance sheet.

Private credit – which is all debt that is not publicly issued or traded – is a loosely defined market that has grown over the past decade largely due to higher interest rates and regulations that have forced banks to divest themselves of their loans. leverage effect.

The market is now about $1.7 trillion, compared with $41 billion in 2000, according to data provider Preqin. The amount is still small compared to the total loans held by US banks – more than $12 trillion.

“An Arrangement”

Citigroup is far from the only major bank to tie up with a private lender to pursue this market.

Earlier this month, French multinational bank BNP Paribas ( BNP.PA ) committed $5 billion to a “strategic collaboration” with Apollo subsidiary Atlas, focusing on asset-backed institutional-grade loans. In that alliance, BNP brings the capital, while Apollo originates the loans.

Last May, Pittsburgh regional bank PNC ( PNC ) struck its own deal with asset manager TCW.

Last November, another major French bank, Societe Generale, formed an alliance with money manager Brookfield (BAM) to launch a private debt fund that will raise 10 billion euros ($11.2 billion) in the next four years, which will provide credit to infrastructure providers and other private market funds.

San Francisco-based bank Wells Fargo (WFC) took a similar approach a year ago, reaching an agreement to pass on customer financing opportunities to a business development company launched by money manager Centerbridge Partners.

With a minimum capital target of $5 billion, the fund will get at least two-thirds of its capital from a British Columbia pension fund and another Abu Dhabi-owned sovereign wealth fund.

The story continues

“What this does is it gives us the opportunity to continue to be relevant to customers where it’s not something we’re going to put on our balance sheet, but we can provide them with a solution,” said Mike Santomassimo, Wells Fargo’s chief financial officer. at a UBS conference in February.

“Partnership may be the wrong word, but we have an arrangement,” he added.

“Friends”

Despite these new alliances, the dynamics of the relationship between the regulated banking system and lending by non-bank financial firms is far from simple, according to McKinsey senior partner Ju-Hon Kwek.

“Banks and private equity funds have been kind of the enemy for a long, long time,” said Kwek, who holds a lead role for both McKinsey’s North American asset management and private equity practices.

Banks can compete with private credit pools to finance transactions. They also sometimes sell syndicated loan tranches to the same private credit groups. And in many cases, the country’s biggest banks lend to the same groups.

Highlighting both the increased regulatory restrictions that banks have on using their own capital and the lower leverage that private equity funds use when lending to borrowers, Kwek pointed out that these formal partnerships demonstrate that the private credit space is in -really expected to continue to grow, and banks are now seeing this. as another income stream.

Lending in that space is also likely to continue to grow beyond traditional financing for corporate acquisitions. Over the next decade, Kwek and his collaborators expect an additional $5 trillion to $6 trillion in borrowing to shift from banks to private credit, involving everything from financing infrastructure projects to aircraft leasing, student loans, residential mortgages and higher risk commercial real estate loans. real estate projects.

“It Could Be Hell To Pay”

Some banks are still choosing to go it alone in the world of private credit, even as others join Wall Street superteams. Goldman Sachs (GS) has its own private lending platform within its asset management division, which can source private financing offers from its investment bank.

Goldman Asset Management raised more than $20 billion for a private credit fund in late May.

JPMorgan Chase ( JPM ) has not announced any formal partnership, although it has been in talks since late last year. A few years ago, it set aside $10 billion of its balance sheet for direct lending.

JPMorgan CEO Jamie Dimon is among those who have expressed some concern about the rise in private credit, arguing that it creates more opportunities to let risks outside the regulated banking system go unmonitored.

“I expect there will be trouble,” Dimon told a Bernstein industry conference in late May, adding that “there could be hell to pay” if retail investors in such funds post deep losses.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto and other areas of finance.

Click here for an in-depth analysis of the latest stock market news and events in changing stock prices.

Read the latest financial and business news from Yahoo Finance