The Unicrunch — The $25bn opportunity and private credit gets political

Sami Vukelj
+Peter Benson

26 September 2024•4 min read

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Citi lights

Citigroup and Apollo have paired up to launch a new $25bn private credit program, adding another name to the growing list of bank-PC partnerships.

Some players are finding that cooperation can lead to better outcomes than competition when it comes to banks and direct lenders, reframing the narrative around their relationship. It’s less traditional banks versus PC firms narrative, but rather battles between PC and bank tag-teams.

In this hybridized arrangement, where banks and direct lenders operate as a sort of joint platform designed to capture the widest possible range of borrowers between the two, there could still be niches for those who aren’t quite at 25 big ones.

Wells Fargo’s strategic relationship with Centerbridge Partners, for example, is focused on non-sponsored middle market companies, putting it in a completely different lane than the Apollo-Citi program, which is geared towards corporate and large-cap sponsor-backed companies.

The benefits offered by these sorts of arrangements — for banks, being able to offer more solutions for clients and for lenders, greater access to financing opportunities — still apply here, even if they operate at the lower end of the market.

Other strategies, however, involve more overlap. Thus recreating some of the competition these firms are familiar with in their respective markets. Barclays’ agreement with AGL Credit Management, for example, is geared towards large corporate borrowers and seeking opportunities at “the convergence of the private credit, broadly syndicated loan, and high yield bond markets,” according to the press release.

Citi and Apollo will be hoping to court the same set of upper middle market borrowers. And more broadly they’ll all still have to contend with the high degree of competition coming from other banks and lenders.

But for now Apollo’s program stands out for its scale, as they anticipate potentially financing more than $25bn worth of debt in the coming years through this program. While some of the other largest direct lenders may have the capacity to deploy capital at a similar scale, only few have brought them to a bank partnership — yet.

Government fuel

It’s no secret that Chinese electric vehicles are leaving most of their competition in the dust. Chinese firms, led by BYD, are producing more models, more cheaply, and at less cost to the end consumer.

As the election is getting close, the US government is focused heavily on all things China, with EVs being a key part of its strategy. The Biden administration has finalized 100% tariffs on the vehicles themselves, as well as smaller but still burdensome tariffs on component parts. This week, there has been mention of even tougher measures in the form of an outright ban on Chinese and Russian software for the vehicles.

The government isn’t only focused on curbing external forces, looking at its own EV industry and trying to grow it with the help of private credit. Monroe, a middle market direct lender, has been selected by the White House to be a provider of bespoke loans to EV businesses in the US to help them grow.

Monroe is targeting a fundraise of around $1bn for its inaugural fund focused on the EV market. The Drive Forward Fund could be the first of a series of funds targeting original equipment manufacturers (OEMs) and tier 1-3 businesses that support the manufacturing of the vehicles.

Private credit may be the perfect solution because it fills a financing gap. “For a lot of these businesses, it is difficult for them to acquire highly regulated financial institution capital,” Alex Parmacek, portfolio manager for the fund, told 9fin.

The majority of the fund will be focused on the smaller tier 2 and tier 3 auto parts manufacturers, software providers, and battery manufacturing companies. The goal is to make the sector in the US more robust and liquid in order to stave off competition from elsewhere, namely China.

Whether the program is successful will be predicated on how quickly the capital can allow US-made vehicles to compete on price. Monroe is still in the process of applying for SBA licensing in order to provide government-backed loans as part of the offering. It expects to begin investing later this year, Parmacek said.

While tariffs and bans try to slow the march of Chinese EVs in the western hemisphere, will private credit’s support help the US catch up? Probably best to put your seatbelt on and get ready for a long drive.