Gauging the potential size of “asset-based credit” is more art than science. KKR’s definition suggests a $7.7trn market opportunity by 2027, Apollo thinks $20trn or more today, while Horn’s business at Blackstone, which has a somewhat larger perimeter drawing in infrastructure credit and energy, probably hits highest of all.

“The asset-based finance sectors have a very large addressable market,” said Horn. “We invest in several markets which are north of a trillion dollars in their own right — take data centers, energy infrastructure, credit cards and residential real estate. Each of those is more than a trillion dollar market, and that’s four of perhaps 25 or so markets we invest in. To be relevant to a big bank, at their scale, you need to be multi-billion dollar in scale yourself for a transaction or partnership.”

There’s a clutch of well-publicized trades closed by Blackstone and its peers in the past couple of years, which have become emblematic of the market opportunity in question.

Examples include Blackstone’s deal with Barclays, derisking Barclays’ US credit cards business and agreeing a forward flow; KKR and Carlyle’s purchase of the student loans from Discover Financial, and KKR’s BNPL forward flow with PayPal.

Far more activity, though, goes on below the surface; if Blackstone is funding an unlevered “forward flow” transaction, committing to buy the origination from a private lender and hold it without distributing it, it’s hard for any but those around the deal to catch wind of it.

Forward flows have long been a common structure, but the traditional route involves leverage, and often a market exit.

A credit fund agrees to buy loans as they’re originated, sourcing senior debt from a bank and perhaps mezzanine from another fund to pay for the loans as they come in.

This adds complexity (the leverage provider, as well as the fund and the originator need to be aligned on loan characteristics, pricing, hedging, servicing, and any capital markets take-out), and makes renegotiation more challenge, but it’s still a well-trodden path.

But increasingly, the likes of Blackstone can keep much of this under one roof, simplifying deal structures and execution, and giving growing lending businesses a longer runway.

As insurance and pensions advisor Mercer says in its white paper on private IG asset-based finance: “Alternative lenders have stepped into this gap to customize loans and provide certainty of execution against specified assets. As institutional acceptance increases, alternative lenders have grown and achieved a sufficient capital base to offer specialty finance issuers certainty of execution at scale in the private markets.”

High grade future

The big difference in the past couple of years has been the appetite of Blackstone and its peers for investment grade risk.

Blackstone, as well as peers like Apollo and KKR, have increasingly realized the investment-grade markets are much, much larger than leveraged credit.

There’s limited room for Blackstone’s liquid credit business, already the largest CLO manager in the world, to grow its AuM by purchasing more leveraged loans. BCRED, its private credit BDC, is also largest private credit investor in the world; growth in these segments can’t run much ahead of the overall growth in sponsor buyout financing.

The problem for these alternatives giants is that regular-way investment grade bond markets are efficient and don’t yield very much. There are some very large special situations, where Apollo has made well-flagged investments in private IG corporate credit — lending money to SoftBank secured on its fund holdings, or Vonovia secured on a real estate portfolio, or $11bn to Intel for a new chip fabrication plant, for example.

But these are rare for a reason. Most of the time, large IG companies issue large IG bonds to IG bond funds.

The reason asset-backed markets are particularly exciting is that the alternative asset management groups can carve out IG-equivalent risk from previous unfinanced portfolios of assets, which may have sat with banks in the past.

While asset-backed strategies focused on junior or mezzanine risk in consumer assets can struggle to scale, taking the IG piece as well achieves the holy grail — IG risk, at a decent spread to IG benchmarks.

Private infrastructure finance can fulfil a similar role, and in good size. Blackstone, for example, did a $600m senior secured facility for Aligned Data Centers, announced in March, using insurance capital, as well as term debt for a natural gas distribution facility, among other deals.

Jon Gray, Blackstone’s president, said during second quarter earnings: “We placed or originated $24bn of A-rated credits on average in the first half of 2024 — up nearly 70% year over year — which generated approximately 185 basis points of excess spread versus comparably rated liquid credits. Our insurance AUM grew 21% year over year to $211bn, driven by strong client interest in our asset-light, open architecture model. We have four large strategic relationships and 15 SMAs today, and we expect our business to grow significantly from here.”

Martin Kelly, Apollo’s CFO, said it had “continued to deliver value so far this year, driven by deployment into directly originated investment grade credit of more than $10bn, spread of approximately 200 basis points above comparably rated public corporate benchmarks.”

In several cases, Blackstone and its peers have stepped directly in to the investment-grade warehousing and securitization business, as previously managed by investment bank securitization units. Pressure on the US regional banks, which were major capital providers to specialty finance companies, has accelerated this trend and driven some of the major trades.

Thus Blackstone bought the specialist lending portfolio of KeyBanc (with a forward flow to continue origination), Ares Alternative Credit bought PacWest’s lender finance portfolio, and Apollo bought Credit Suisse’s entire securitized products business complete with bankers.

“In the private investment grade markets, there are only a few firms with the scale, the brand, the systems, the portfolio management and risk management capabilities to operate successfully,” said Horn. “Our clients are moving part of their liquid fixed income to the private markets, and they understand the infrastructure and breadth of platform that is required in these activities.”

Insurance money is the key engine behind the private investment grade theme.

Blackstone is unusual among its peers for not having a captive reinsurer behind it, as Apollo does with Athene and Athora and KKR does with Global Atlantic.

It does have several strategic insurance relationships, though, including a stake in Resolution Life, and, as Gray noted in the earnings call, north of $200bn in insurance assets under management, which Blackstone says makes it the largest non-captive manager of alternative assets for insurance clients.

Investment grade assets are, in theory, easy to lever, but that’s not the trade here — beyond the structural leverage associated with insurance company balance sheets, the idea is to offer insurers IG risk at a spread to corporate IG, not to relever this back in hedge fund territory.

Hope for the banks?

Even with Blackstone pushing further into full capital structures and investment grade risk, Horn still sees a role for banks.

“With change comes opportunity, and there’s still a massive market opportunity for the banks,” said Horn. “Alternative capital providers like ourselves are a material part of an extraordinarily large market, and there are parts of the market which are less interesting to us, or may not deliver in the way we’d like.”

Several of the large ABF trades away from Blackstone have lent heavily on bank leverage — PayPal for example, Ares-PacWest, financed by Barclays, or indeed Atlas SP Partners which has more than $20bn in bank financing, most recently including a $5bn facility from BNP Paribas.

Major investment banks are increasingly looking to partnerships with alternative lenders, often focused on corporate private credit — Examples include Citi’s deal with Apollo, announced at the end of September, JP Morgan’s deal with Cliffwater, Shenkman and FS Investments, Société Générale’s joint venture with Brookfield, Barclays and AGL’s cooperation agreement and others. Banks like Goldman Sachs, which already have extensive private credit funds under their own roof, might prefer to partner down the hallway rather than externally, but the tie-ups are coming thick and fast.

“Banks want to focus their lending on their core franchises, and grow their lending activities in an accretive manner,” said Horn. “A bank might be offering $200m at a time to a counterparty, but they can partner with us and increase that commitment materially. They will retain the client relationship and this will also position them well for fee businesses like IPOs or an ABS takeout.”

Horn also argued for a broad approach to partnerships — there’s no need to be tied down to a single partnership arrangement, or to outsource dealflow to banking relationships.

“In the areas where we want to have strong origination in-house, we’ve built that out. In direct lending, for example, we have very extensive coverage,” said Horn. “We feel there are opportunities to partner with banks in certain areas, if they have specialized origination or there’s a particular area we can add value to them. We think it’s important to partner with the banking community broadly, and to have multiple partners. We enjoy good relationships with multiple banks, and we think that’s an advantageous way to approach the market.”

One way banks can stay relevant is in offering fund level leverage. While this doesn’t have much application in insurance-driven private IG, the massive growth in private equity and debt has meant multi-billion tickets are available in funding private credit portfolios.

This is effectively a climb up the capital structure; while banks used to do senior lending, now they’re offering senior lending secured by diversified pools of someone else’s senior lending.

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