3 Things to Know as Private Credit Heads Toward a $2 Trillion Industry

The private credit market is booming — and has the potential to reshape lending, and risk, too, in financial services.

Generally and conceptually speaking, the private lending market, estimated by the International Monetary Fund to top $2 trillion at present, offers a capital “lifeline” of sorts to a variety of borrowers, especially smaller firms that may have been, or still are, underserved as they seek capital from traditional channels. Private lending may also be extended to firms that are backed by private equity vehicles.

The American Investment Council, as noted here, has estimated that as recently as 2022, the median size of a firm receiving private credit — $500 billion of which went to U.S. firms — has been an enterprise with 150 employees.

Several headlines through the past few days have shone a spotlight on bank/asset manager tie-ups — with marquee names in both segments of finance — that are putting tens of billions of dollars to work in private credit.

As reported by Bloomberg, JPMorgan Chase has struck a partnership with Cliffwater, FS Investments and Shenkman Capital Management Inc. As part of those joint efforts, JPMorgan will reportedly originate loans and invest in them “alongside the direct lenders,” per the report.

Separately, and also this month, Citigroup has linked up with Apollo Global Management to form what the firms termed a “landmark $25 billion private credit, direct lending program initially in North America, with the potential to expand to additional geographies.”

And last week, BlackRock and Santander announced the signing of a memorandum of understanding (MoU) by which funds and accounts managed by BlackRock will invest as much as $1 billion per year in “select project finance, energy finance, and infrastructure debt investment opportunities with Santander through structured transaction formats.”

The conventional wisdom may be that private credit exists to fill the gaps that might be created when banks tighten their underwriting or deny loans outright to smaller firms deemed to be higher risk. And indeed, as estimated by the Bank for International Settlements, private credit grew by leaps and bounds in the wake of the 2008 financial crisis, from $300 million back then to the current, aforementioned $2 trillion tally.

The fact that the banks are getting into the act more fully reflects at least some of the pressures from competitors — FinTechs and other nonbank entities. In the ongoing jousting over regulatory changes, and capital requirements, the potential to grow a client base while lending, indirectly, holds appeal.

But the burgeoning private credit market may also reshape risk in the industry — and regulators are watching.

In a speech this past May, titled a “current assessment of financial stability,” Federal Reserve Governor Lisa Cook stated that “history teaches us that rapidly growing lending often involves weak underwriting or excessive risk appetite … as a result, I will be monitoring the contribution of private credit to the overall leverage of the business sector and the evolving interconnectedness between private credit and the rest of the financial system.”

And in a year-end 2023 report by the Financial Stability Oversight Council, there’s the observation that: “unexpected rate of default [by private-credit borrowers] may have a cascading effect across broader financial markets, the impact of which may be more or less pronounced depending on the nexus private credit funds share with other market participants, such as fund investors, other investment funds managed by shared investment advisers, and various counterparties, as well as market participants that may be invested in other levels of a particular company’s capital structure … Private credit is a relatively opaque segment of the broader financial market that warrants continued monitoring.”

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