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Private Credit 

Josie Shillito

Morgan Stanley is among the latest investment banks to attempt to bite back market share from private credit with the anticipated close of its European private credit fund this month, according to 9fin sources. 

However, market sources cautioned that strategy is king - and, if that strategy is to compete with other direct lending funds, investment banks may well find their eyes are bigger than their stomachs. 

“The market is already well covered, there aren’t enough deals to go around,” said a banking source.

After hiring asset manager Arcmont’s Marc Joachims in 2022, Morgan Stanley has now recruited 10 of its 15-strong team target in London, and is approaching the first close of its European private credit fund, according to the 9fin sources.

While the fundraising target remains confidential, the armoury in Morgan Stanley’s US private credit coffers is $15bn. And, although some of the large US investment funds invest off their balance sheet, Morgan Stanley is joining the likes of Goldman Sachs and investing using a GP-LP structure with the bank’s asset management division. 

Fundraising from independent LPs as opposed to investing from the bank’s balance sheet enables a certain degree of independence, explained one of the 9fin sources. It also ring fences the private credit strategy from the bank’s overall investment strategy.

In the case of Goldman Sachs, it can grow into a heavyweight business. 

“The private credit business within Goldman Sachs Asset Management is one of the largest investors of private credit globally with over $100bn AUM,” said Stephanie Rader, global head of capital raising for private credit within Goldman Sachs Asset Management, told 9fin. “Over the last 27 years, we have invested $170bn globally across different market conditions and raised over $135bn of capital in private commingled credit vehicles across our three core strategies: senior direct lending, mezzanine and hybrid capital.” 

However, the strategy to fundraise as opposed to using balance sheet money can also be a drawback for new funds, according to a second market source.

“It’s a very, very tough environment in which to fundraise,” said the second source. “Even the established [private credit funds] are finding it difficult, let alone a new entrant.”

According to consultancy Deloitte’s Private Debt Deal Tracker, fundraising volumes have been reasonably robust but the number of funds raised have dwindled.

At a time of wider market volatility, investors are favouring established names over new entrants. 

The asset management arms of a number of investment banks operate as funds in the private credit space, or intend to. Credit Suisse Asset Management raised $1.7bn in the US in 2022 for a first private credit fund, and, before that, in 2020 partnered with the Qatar Investment Authority to debt-finance middle-market and larger companies in the U.S. and Europe. 

According to Bloomberg, Deutsche Bank is also planning a push into private credit, seeking to raise €2bn from new and existing investors for corporate, real estate, and distressed credit.

Japanese bank SMBC and asset manager Park Square operate a joint venture in direct lending.

In Morgan Stanley’s case, it is using seed capital from its balance sheet, then fundraising the rest. It’s focus will be on deals with tickets of between €50 and €250m, either as sole investor or as part of a club. The bank has a large asset management division, and is able to leverage existing client and LP relationships in its fundraising process.

“I’ve been headhunted about ten times in the past 18 months to join every single investment bank in private credit - US, Japanese, Swiss, they’re all doing it,” said a third market source. 

Meanwhile, Barclays is planning to run a direct lending strategy from its corporate and investment bank, according to Bloomberg.

However, market sources caution that unless the bank has a wider strategy for entering direct lending, then its private credit fund is no different from the other 90 or so out there in Europe.

“My personal view is that there are ninety or so active funds in the UK. The market is already well covered. There aren’t enough deals to go around,” said the banking source.

According to 9fin’s private credit instrument (accessible to clients), still in its beta phase, completed deals halved in number between Q1 2022 and Q1 2023. If taken as a last-six-months’ view, the trend to half in number continues between the immediate last six months and the same period the previous year.

Although the 9fin private credit instrument is in its beta phase, this reduction is reflected in the Deloitte deal tracker, which shows a reduction from 220 deals in Q4 2021, down to 165 in Q4 2022. 

In this kind of environment, it makes sense for an investment bank entrant to have a different strategy, pointed out the second source.

US investment bank JP Morgan invests not from a fund but off its balance sheet. According to a source close to the bank, they will finance tickets of up to $500m per deal. 

However, rather than competing with other direct lending funds for the business, they will choose to finance a deal if there is a relationship reason for doing so, said the second source.

“JP Morgan use their balance sheet direct lending to attract broader business. They’ve completed a lot of transactions, they have a credible deal flow. If you’re doing it out of the asset management arm of your bank, or out of a direct lending fund, then you’re just chasing the right deal along with everyone else,” argued the second source.

The other advantage of balance-sheet lending is the ability to dial up or down private credit activity as it suits, the second source went on.

“You can switch in or out - whereas with LPs you have agreed certain terms and you’re stuck in the market, whether you want to be or not.”

Flexibility to dial up or down in private credit is valuable at a time of overwhelming levels of dry powder in the market. 

According to market data provider, Preqin, private debt is tracking private equity’s rise in undeployed capital. The below chart shows the situation in North America, but it is broadly reflected in Europe, too.

“If you’re a new investor in private credit, you’re competing with absolutely everyone else for these deals,” said the second source.

Morgan Stanley and Barclays declined to comment. Deutsche Bank and SMBC did not respond to requests for comment.

Morgan Stanley joins bank push into European private credit

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