MINSKY'S MOMENT AGAIN

 Banks wonder whether to beat private credit upstarts — or join them

Mar 21, 2024

The ascendance of private credit into mainstream finance has reached its logical endpoint: a courthouse in Mecklenburg County, North Carolina.

Barings, the asset manager housed within insurer Mass Mutual, has sued an upstart private credit platform, Corinthia Global Management, over charges the latter improperly poached several debt investors at Barings.

Such employment disputes between firms are hardly unusual in finance. And Corinthia is just the latest to take advantage of the private credit boom.

The ironic quirk, however, is that this newcomer is backed by Japan’s Nomura, a traditional bank private credit has been designed to displace.

The financing packages that typically back billion-dollar leveraged buyouts are known as “broadly syndicated loans”. Traditional deposit-taking banks originate these leveraged loans and parcel them out to specialist funds including so-called collateralised loan obligations. Historically, it has been a standardised if lucrative product.

So-called direct lending deals match a specialist fund that bilaterally offers corporate loans that are typically held to maturity. This is not a new structure.

Traditional private equity firms in the past five years have however raised mega private credit funds that can go head-to-head with the bank-originated syndicated loans extended to companies of in effect any size. Data shows that this direct lending market now has $800bn of assets under management, compared with about $1.4tn of syndicated loans outstanding.

Still, rather than simply competing head-to-head with private credit, banks have decided they must embrace the new world. Private credit deals, in addition to generating interest income, also charge management fees to limited partners. The deals are often complex and companies increasingly want sophisticated financing solutions.

Each side will have to decide how much to co-operate and how much to compete. Banks, for example, already provide “back” leverage to private credit funds to juice their firepower. Providing talent in a midnight raid, however, might be a bridge too far.