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Banks’ private-credit fightback may underwhelm

Investment banks are pondering how to fight off private credit, the $1.2 trillion industry that’s displacing them in the lucrative business of funding buyouts. Yet the ideas floated by JPMorgan, Deutsche Bank and others bring fresh challenges. Direct lenders, often run by asset management groups such as Blackstone and Apollo Global Management, are kicking banks off big leveraged-buyout deals. Thoma Bravo’s $10.7 billion Anaplan purchase is one example. Borrowers appreciate the certainty of using such vehicles, which typically keep the loans for life.

Investment banks, by contrast, need to sell loans on to pension funds and asset managers, and can jack up interest rates during the syndication process if debt markets are choppy. There’s much to lose: banks earned $7 billion in leveraged-loan fees in the first half of 2022, according to Refinitiv. Bankers are experimenting with several responses. JPMorgan is making loans and holding them to maturity rather than trying to sell them, the Financial Times reported. That allows lenders to offer fixed rates to borrowers. Second, others like Deutsche and Credit Suisse are raising their own private-credit funds to collect asset-management fees. JPMorgan’s approach is essentially a return to traditional bank lending.

But it ties up balance-sheet capital for the life of a loan. By contrast, the current norm of selling the debt allows banks to recycle capital several times a year and on average collect a 1% fee each time, based on Refinitiv data, boosting returns. Meanwhile shareholders and regulators may worry about a bank’s exposure to risky lending the longer a loan stays on balance sheet. Raising a fund, as Deutsche Bank and Credit Suisse are doing, at least leaves the risk with third party investors. And it’s not new: Goldman Sachs’s asset management arm, for example, does private credit. But some banks may struggle to stand out in a crowded field. Giants like Apollo, whose credit arm manages $373 billion, will be hard to catch. There were about 1,000 private debt funds raising money in late June, according to Preqin. True, banks don’t always have to compete with private credit.

They can make money lending to funds, or even underwriting large private deals that need several funds. The main cause for hope, however, is that private credit managers may be getting over their skis. Almost two-fifths of direct lenders would fund borrowers with debt levels exceeding an eye-watering 7.5 times EBITDA, according to a recent survey proskauer-private-credit-poll-12493948. There’s a risk that insurers or pension groups that invest in private-credit funds pull back when defaults pick up. That would take the heat off investment bankers.

JPMorgan’s investment bank has set up a unit to make leveraged loans and hold them to maturity, the Financial Times reported on July 20. The plan is intended to counter the threat from private-credit funds run by groups like Ares Capital Management and Apollo Global Management.
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Deutsche Bank is considering raising a private credit fund, Bloomberg reported on June 2.

Credit Suisse on July 13 said its asset-management arm had raised a $1.7 billion private-credit fund.
Source: Reuters (Editing by Neil Unmack and Streisand Neto)

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