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Wall Street is divided over the rise of private credit
The debate on Wall Street over the rise of private credit is becoming more intense.
On one side is the head of the largest U.S. bank, Jamie Dimon, who argues that increased lending by private equity firms, money managers and hedge funds creates more opportunities to leave risks outside the regulated banking system. be monitored.
“I expect there will be problems,” JPMorgan Chase said (JPM) the CEO said at an industry conference in Bernstein in late May, adding that “there could be hell to pay” if retail investors in such funds suffer deep losses.
JPMorgan Chase CEO Jamie Dimon. (REUTERS/Evelyn Hockstein) (REUTERS/Reuters)
On the other side are the senior executives of some of the largest financial managers in the world who do not hesitate to reject this argument.
“Every dollar that leaves the banking sector and goes into the investment market makes the system safer, more resilient and less leveraged”, Marc Rowan, Apollo (APO) CEO, said at the same Bernstein conference attended by Dimon. (Note: Apollo is the parent company of Yahoo Finance).
Apollo Global Management CEO Marc Rowan in Hong Kong last November. (Vernon Yuen/NurPhoto via Getty Images) (NurPhoto via Getty Images)
Private credit funds, their proponents argue, do not face runs on deposits and do not rely on short-term financing – a model that has proven problematic for some regional banks that ran into trouble last year and had to be seized by regulators.
Instead, they lend money obtained from large institutional investors, such as pension funds and insurance companies, who know they will not get their money back for several years.
Another top executive at private lender giant Blackstone (BX) used the same Bernstein conference to cite the mismatch between assets and liabilities that ended up sinking First Republic, the San Francisco regional bank that went bankrupt last May and was auctioned to JPMorgan.
Jonathan Gray, COO of Blackstone. (Heidi Gutman/CNBC/NBCU Photo Bank/NBCUniversal via Getty Images) (CNBC via Getty Images)
“I had 20-year assets and 20-second deposits,” said Blackstone COO and general partner Jonathan Gray.
“And if we can put those loans directly on the balance sheets of a life insurance company, we’ll have a better match.”
The rise of private credit
There is no doubt that private credit is increasing as traditional banks pull back on lending during a period of high interest rates from the Federal Reserve and concerns about a possible economic recession.
The global private credit market, which represents all debt that is not publicly issued or traded, grew from $41 billion in 2000 to $1.67 trillion as of September, according to data provider Preqin. More than $1 trillion of that amount is held in North America.
The sum is still small compared to the total loans held by US banks – more than $12 billion – but the concern among some in the banking world is that any panic among borrowers could spread if things get worse. .
The story continues
“I’m not sure that a trillion-and-a-half-dollar private credit market is particularly systemic, but the point is that these things can have a snowball effect,” UBS Chairman Colm Kelleher said in an interview to Bloomberg previously. this year.
For now, private credit performance is solid despite the concerns.
During five of the last six quarters, private credit has provided higher returns to investors than on average over the past decade, according to an aggregate private credit index created by Preqin.
It also outperformed a similar index measuring aggregate returns in private equity over the same period.
“Everyone can look pretty good when everything goes up to the right, but it gets harder when you go through cycles,” said John Waldron, COO of Goldman Sachs, at the same conference as Bernstein.
‘Dancing in the streets’
Private credit assets are varied. They can range from corporate loans to consumer auto loans and some commercial mortgages. Loans are especially useful for mid-sized or below investment grade borrowers in special situations such as hardship.
Terms are generally more flexible than banks require, with adjustable interest rates a potential boon or dilemma for borrowers who expect interest rates to eventually fall.
Some bankers argue that money managers have an unfair advantage because they don’t have to operate under the same capital requirements as banks. And banking regulators are preparing new rules that could make those capital requirements even more stringent.
When these higher standards were first proposed last year, Dimon joked that private equity lenders were certainly “dancing in the streets.”
JPMorgan competes with private lenders but also serves some as clients. (REUTERS/Eduardo Munoz) (REUTERS/Reuters)
But there are some signs that Washington may be preparing to intensify its scrutiny of these funds. The Financial Stability Oversight Board voted to approve a new framework to label companies as “systemically important,” a label that triggers new oversight by the Fed.
The new framework creates an opening for companies other than banks to obtain this label. The funds argue that they do not present the same systematic risks as banks and, therefore, the label is not appropriate for them.
The relationship between traditional banks and private asset lenders is complicated. They compete with each other, but many banks also lend money to these same asset managers.
Dimon acknowledged this, saying there are many “brilliant” private lenders. “I mean, I know them all. We bank a lot of them. They’re our customers.”
“We’re in a unique position to be in the middle of all of this and I think it’s going to continue to grow,” Troy Rohrbaugh, co-CEO of JPM’s commercial and investment bank, said last Wednesday at another conference.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, crypto and other areas of finance.
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