Outsize appetite has pushed private credit lending growth to mid market companies above that from banks in the United States, with a proliferation of products to allow local investors access to those opportunities from further afield.
Regulation introduced after the global financial crisis and banks’ aversion to risk meant traditional sources of debt had “become completely irrelevant” in the US, according to Jeff Day, the capital markets head at Morgan Stanley’s private credit team.
“Private credit has taken almost all the market share from the commercial banking market in the US,” Mr Day said. “And you are now seeing bigger transactions getting done, which is taking share on the upper and syndicated end of the market.”
Morgan Stanley is partnered with La Trobe Financial, owned by Canadian asset management giant Brookfield [https://www.afr.com/street-talk/ eyes-on-brookfield-s-accc-approvals-f or neoen-20240602-pSjimg], to offer the private credit fund to retail investors. Separately, Pengana Capital is teaming up with Mercer, a New York-based group, for a US private credit “online term account” due to launch this week.
The new products will target domestic investors looking for more yield amid a cost-of-living squeeze and persistent inflation. They come as major investors including David Di Pilla’s HMC Capital, John Wylie’s Tanarra Capital and Phil King’s Regal Partners pile into the sector [https://www.afr.com/companies/financial-services/fortunes to-be-made-as-the-private-credit-boom-is-going-public-20240603-p5jiyh], pursuing transactions to give their respective asset management firms greater exposure to private credit.
“The banks have exited that market, they are not coming back,” Mr Day said. “There will be ebbs and flows, but there has been structural changes where private equity firms that own those companies prefer to work with private credit managers like us.”
The global private credit market, also referred to as private debt or direct lending, topped $US2.l trillion ($3.2 trillion) last year with about three-quarters of this in the US, according to the International Monetary Fund. But retail access has been limited, and is largely dominated by bigger family offices and institutions.
‘Private credit managers are the new banks’: Pengana
Private credit investors in the US are seeking to benefit from regulators’ concerns about the “liquidity mismatch” where banks lend long to companies, over five or seven years, when most of their deposits can be withdrawn at any time.
The contagion risk for banks was on show last year: Silicon Valley Bank imploded when a mismatch risk [https://www.afr.com/link/follow- 20l8010l-p5fgpl] relating to bond investments materialised.
The healthy yields on offer from private credit investing are a function of the higher spreads private credit lenders charge to US companies, typically around 550 to 600 basis points over base interest rates. This is more than the 200 basis point spread typically added by banks when they were lending before regulators jacked up their capital levels.
“They talk about these private credit managers being like the new banks. Almost all lending to US corporations – around 85 per cent – is now being done by private credit,” said Pengana chief executive Russel Pillemer.
Russel Pillemer, CEO of Pengana Capital Group. It has launched TermPlus, offering a two-year yield of 8 per cent. Michael Quelch
“There is an anomaly in the market, but the returns are sustainable. They are being driven by regulatory interference in the market, which has allowed private credit firms to capture the space.
“If the regulators said tomorrow they were removing obstacles to bank lending, the opportunities would disappear overnight. But the regulators are doing the opposite: tightening more and more as time goes on.”
The new offerings cannot be compared to bank deposits – they are not government guaranteed – but may attract the same group of savers who put money into major bank term deposits.
Pengana’s offering, known as TermPlus, is targeting 7.35 per cent for one year, 8 per cent for two years and 8.5 per cent for five years. This is around twice the yield from a major bank term deposit; a two-year term deposit at Commonwealth Bank, for example, is currently paying 3.95 per cent.
Pengana, with Mercer, will create a “fund of fund”, which will tap 20 underlying managers and 2000 loans. Three-quarters of these are to US mid-market companies, while a quarter are in Europe. Typical borrowers are earning between $50 million and $250 million across various industries. A retail investor, with a minimum of $2000, can open a unit trust in a fully digital process that takes just a few minutes.
La Trobe CEO Chris Andrews said that while private credit was booming in the US, it would take longer for the phenomenon to take hold in Australia. US and European private credit markets are different to Australia, where major banks remain the largest lenders to companies. As a result, private credit in Australia is mostly focused on the riskier end of property and construction.
“We are seeing the rise of corporate private credit, but here the story is more nuanced – because private credit is stepping first into spaces that the banks have exited”, like commercial real estate and construction sectors, Mr Andrews said.
Unlike Australian private credit funds, investors in US-focused retail funds will be taking exposure to the risk of systemic corporate bankruptcies, which could occur in a strong recession. But, Mr Pillemer said the credit managers chosen by Mercer are well diversified, and average reported losses this cycle have been less than 20 basis points.
