Will more banks join the private credit fray in 2024?

A growing number of banks are joining the lucrative private credit business, but can they make their mark in an already busy marketplace?

In the last six months, banks such as Wells Fargo, Deutsche Bank, Societe Generale and Rabobank have all launched private credit initiatives—either independently or in partnership with established operators. Media reports have also speculated that Citi, Barclays and Nomura could soon enter the fray and that JP Morgan plans to expand its existing private credit strategy.

It's already a $1.5 trillion industry that has more than doubled in size since 2016, according to PitchBook's latest Global Private Market Fundraising Report. Direct lending funds—vehicles focused on providing financing to corporates—accounted for nearly a third of global private debt AUM as of the end of March.  

"There are already many well-established private credit funds—both independents and the private credit arms of the big private equity firms. It is a very crowded market," said Ben Wilkinson, a partner in law firm Baker McKenzie's banking and finance practice.

That growth has been spurred by a decline in bank-led corporate lending, particularly in leveraged finance. So, why are banks now launching their own private credit initiatives?

Quite simply, they want to reclaim lost market share. In the first half of 2023, private credit providers accounted for 108 of the 120 LBO financings tracked by PitchBook LCD, according to PitchBook's H1 2023 Global Private Debt Report. Syndicated loans—the traditional preserve of banks—claimed just 12 of those transactions.

"The private credit story is growing year-on-year, and it's an irreversible trend in my mind," said Alex Robb, a partner in law firm Ropes & Gray's finance practice. "It's inevitable that banks will want to have a hand in that space, so they can stay relevant in financing leveraged buyouts."

This is a sentiment shared by Wilkinson. "It seems like there is an 'if we can't beat them, join them' moment happening," he said.

Having the capability to act as a direct lender gives banks more flexibility in what they can offer clients and in how they can approach risk. Compared to syndicated loans, the structure of private credit deals means that, while the risks tend to be higher, so do the returns.

"I expect to see a lot of PE firms run a dual track process—private credit and syndicated debt—right up to signing of the financing for their buyouts. Banks will want to be able to provide and be involved in both options, so that they don't miss out, whichever option ultimately wins out," said Anthony Kay, another partner in Baker McKenzie's banking and finance practice.

The situation seems to have come to a head in recent months, with the sophistication and size of private credit transactions reaching new heights. For instance, the mega-buyout of Norwegian online classifieds business Adevinta is being backed by a €4.5 billion (about $4.9 billion) debt package financed by a club of private credit funds—one of the largest such financing packages on record.

This is a sentiment shared by Wilkinson. "It seems like there is an 'if we can't beat them, join them' moment happening," he said.

"Eighteen months ago, you would not have thought you'd see private credit doing deals that size or that number of private credit providers clubbing together. You can see why the banks are concerned and want to be able to play in that market," Kay said.

Although there may be an obvious case for banks to get involved in private credit, their prospects for success are less clear-cut. "Banks are playing catch up in a big way," said Robb, who pointed out that there are already many well-established and credible operators in the market: "Investors can see that track record and trust them to deploy their capital effectively."

He added, "Private debt deals are growing in size, [so] banks looking to raise their own funds are not going to be especially relevant unless they can gain investors' trust in their deployment abilities and raise large amounts of capital quickly."

Banks already have large balance sheets that they could put to work, but risk management and regulatory considerations, among other concerns, mean it can be more practical to create dedicated private credit vehicles. Some banks—including Wells Fargo and Societe Generale—have launched private credit joint ventures with established private markets players, such as Centerbridge and Brookfield.

"Generally, what they want is third-party funds, they do not want to lend off their own balance sheet. The challenge for them is how to get those third-party funds and they are trying to figure that out at the moment," says Michael Schad, partner and head of credit secondaries at Coller Capital.

The questions are not only financial. For instance, banks may face difficulties in being nimble enough in time sensitive LBO situations. "When doing an LBO, you're looking for fast execution. The regulatory framework that banks must operate within can slow processes down," says Robb.

But they do also have strengths that they can play to. "Clearly they are well-plugged in, particularly in the mid- and small-cap space where arguably they know the universe better than many direct lenders," said Schad. As veterans of the LBO markets, they may be able to leverage their knowledge and relationships to get in front of the right people and put together attractive financing packages.

They may also try to capitalize on their ability to provide a broader suite of products and services. "Banks have the ability to position themselves as a one-stop shop for finance, not only providing buyout capital, but also the longer-term working capital, etc.," said Robb. "That could be a strategic advantage over credit funds."

If market conditions remain tight with a relatively small pool of new money deals, banks may quickly have their mettle tested. "We could see increased competitive tension as more players chase fewer deals," said Robb. "The market conditions will test how serious banks really are."

Featured image by Craig Hastings/Getty Images

This article originally appeared on PitchBook News