Essentially, some seem to think of the relationship between syndicated markets and private credit as a zero-sum game. But (and I know we say this a lot around here) it’s more complicated than that!

Private credit firms don’t tend to push the narrative that they are eating the banks’ lunch. Obviously they need to have an argument for why people should use their services, and a lot of those arguments inevitably end up being about why private credit is a better fit than the bank market. Fundamentally, however, the entire genesis of private credit was not stealing business from the banks, but simply picking up the business the banks dropped in the post-crisis period. 

Similarly, while bankers like winning mandates that might otherwise have gone to private credit, it’s not like the two markets are always at loggerheads. There are lots of co-dependencies and synergies. 

For instance, banks have a big business in providing leverage to private credit funds, as well as subscription lines secured against LP capital commitments. They’ve been happy to arrange debt financings for business development companies, whether by underwriting bonds or providing revolvers. 

Ultimately, banks’ business relationships with private credit funds gives them indirect exposure to the middle-market borrowers that they stopped lending to directly all those years ago. It’s why you’ll hear many private credit lenders say the relationship is complementary rather than competitive. 

Balance heat

For big banks, there is another, less circuitous route to the direct lending market: asset management arms. While under the brand of the bank, these funds raise cash from institutional investors and lend in the same way as their private credit peers. Goldman Sachs Asset Management is one successful example. 

These businesses, which are normally under a separate umbrella from the institution’s investment banking group, have been around for years. We wrote about JP Morgan’s asset management arm recently — it’s been seeking commitments for a new fund focused on private credit secondaries.

The increasingly popular move, however, is to house a direct lending business within the investment bank. The latest move is from Barclays, which is reportedly is going to lend its own funds. It follows in the footsteps of JP Morgan, which last year told the FT it was setting aside “a significant chunk” of capital for middle-market deals; this year, Bloomberg reported that the bank had dedicated $10bn to the strategy. 

There are other banks that have had their own balance-sheet lending units for some time, but these two are big names and they have real heft. JP Morgan showed up in a private credit process we reported on recently — the bank has been in discussions to provide financing for New Mountain’s efforts to buy music-rights company BMI.

The thing is, everyone else seems to have the same idea. The US private market is estimated to be $933bn in size, according to a June report by Preqin; some of the biggest direct lending funds (Ares, Blue Owl, HPS) are now household names, and investment giants like Man Group and PGIM are buying their way into the market. 

Moreover, banks are more constrained by regulation than their shadow-bank counterparts — they can’t always sign off on the kind of leverage that private lenders can provide. So can the banks really make a splash in the market? 

Some are unsure.

“I really struggle to see how any bank can become a top 10 contender in private credit,” said Scott Roberts, senior managing partner at Belvedere Direct Lending Advisors, a firm that advises LPs on their investments in private credit funds. 

This might depend partly on ticket size: the big private credit firms write big checks, but they also have significantly more funds to fuel those big checks. Can the banks really compete with that? 

“If the amount they lend is $10bn, then it doesn’t take many deals to run out of capital,” said Roberts.

Time will tell how successful the bank model will be. They have some advantages over the private credit megafirms: funds are required to hit certain return targets, and if they don’t, future fundraises can be impacted. Banks can pull back from the market when things are frothy and lean into it when it’s in better shape; private credit firms are under pressure to get the cash out the door, and essentially cannot pause their lending activities. 

The idea behind limiting the banks’ ability to do balance-sheet lending was to shift risk from the deposit-taking institutions to sophisticated institutional investors. If bank lending takes off, that could prompt some big-picture discussions about systemic risk and the structure of the financial system. 

With sponsors sitting on huge amounts of dry powder, middle-market lending is only set to grow. Politicians who are old enough to remember the financial crisis may sound the alarm if direct lending by banks risks — once again — making these institutions too big to fail.

Fashion faux pas

It’s fashionable to be in mezz today. 

At least, so say Manulife’s co-heads of junior credit Joshua Liebow and Matt Szwarc in a recent 9Questions interview. It’s the most “attractive mezzanine debt environment in over a decade.”

Perhaps it is somewhat hard to accept for financing providers that they can be in or out fashion with sponsors depending on factors beyond their control. You raise multi-billion dollars for one strategy just to find out borrowers suddenly want something else.

For years, the unitranche was preferable because it was a blend of first and second-lien structures into a single facility. Instead of two tranches provided by different groups of lenders, you dealt with just one group. Easy enough.

That was the reality for many years. But in today’s environment, sponsors are focused on minimizing their interest burden by whatever means necessary. Payment-in-kind coupons have been particularly popular in refinancing scenarios, for example; in new-money LBOs, mezzanine financing can appeal to borrowers because of its fixed-rate structure. 

How long this lasts is unclear, though of course unitranches are not going away. And the old-fashioned senior/mezzanine structure has always been an option, despite years of unitranche deals hogging the limelight. 

But will the unitranche regain its popularity if rates go down again? 

Liebow and Szwarc argue there’s a way to go before this happens. “Rates would need to materially decline for unitranche to be as popular as it was in the prior several years,” they said.