Financial Institutions Seek Your Credit Card Debt
Consumer, equipment, and specialty loans from private funds might reach $900 billion in the coming years, up from $350 billion at now, if asset-based financing by these entities expands at the same rate as corporate lending.
Apollo, Ares, Blackstone, and KKR are just a few of the private fund managers that have become increasingly dominant in corporate finance in the last decade. They have now set their sights on the United States consumer, the world’s most valuable commodity.
The companies are making strong inroads into what is known as “asset-based finance,” a broad category that encompasses a wide variety of loans, from credit cards and auto loans to mortgages and loans secured by infrastructure like fiber-optic networks. Such investments affect nearly every sector of the American economy, and the fund’s leaders and owners stand to gain greatly from entering the market.
According to research conducted by Atalaya Capital Management, private sector lending for consumer goods, equipment, and speciality items might increase from $350 billion to $900 billion in the coming years, provided that asset-based financing continues to expand at the same rate as corporate lending. Commercial and residential mortgages, which are also purchased by many of the funds, are not factored into the calculation.
The initiative was spearheaded by Marc Rowan, chief executive officer of Apollo Global Management. Last year, Rowan acquired the division of Credit Suisse that was the leading supplier of asset-based financing on Wall Street. Apollo’s stock price has increased by 60% since then, and he has amassed personal gains of approximately $1.2 billion.
According to what Rowan said last month at an event held by the Economic Club of Washington, D.C., people are increasingly opting to use investment marketplaces rather than banking systems around the globe.
After the financial crisis of 2008, private equity firms started to gradually replace banks as the primary source of corporate loans. They have also started to make inroads into asset-based financing. Although they have been cutting back, banks are still the primary lenders of debt.
Last year, institutions like Silicon Valley Bank went bankrupt due to rising interest rates, which led to a regulatory crackdown and huge losses for banks beginning in 2022. Consumer and mortgage lending fintechs like Upstart also felt the pinch since they rely on bank and credit union loans for funding.
That created an opportunity for private fund managers just when they needed it. The firms had collected $1.5 trillion from their clients for private debt investments by the end of 2022, but according to PitchBook, a financial data company, $434 billion of that money was sitting dormant. The fund managers had to invest the money in order to make fees off of it.
Investment clients have been receiving asset-based financing from teams that asset managers have been staffing.
After acquiring Dan Pietrzak, head of structured finance at Deutsche Bank, in 2016, KKR expanded its asset-based investment management to include approximately $48 billion. Along with Michael Dryden, who was the head of structured finance at Credit Suisse, Sixth Street Partners assembled a 30-person asset-based finance team in 2022.
According to Sixth Street co-founder Michael Muscolino, a small number of funds will emerge as major players to compensate for the unwillingness of banks to keep these assets.
One way asset-based financing helps private funds expand is by connecting them with huge institutional investors that aren’t interested in buying junk-rated corporate debt, which is what most of these funds deal in. Insurance companies, pension funds, and endowments frequently demand investment-grade credit ratings on repackaged consumer and mortgage loans.
In December, KKR acquired $7.2 billion worth of RV-backed loans from BMO. This came after agreeing in June to purchase up to $44 billion worth of buy-now-pay-later loans from PayPal, both current and future.
Companies supported by assets like solar power projects and freight ships have been granted dozens of “warehouse” credit lines by Apollo, which rebranded as Atlas, the Credit Suisse business it acquired. To begin with, the funds are utilized to fund consumer loans, which are subsequently pooled and sold to private credit organizations or investors in asset-backed bonds.
In October, Sixth Street, Pacific Investment Management, and KKR acquired $8 billion in loans from GreenSky, a consumer lending affiliate of Goldman Sachs. The U.S. division of Barclays sold $1.1 billion worth of credit card debt last month to Blackstone.
Prior to PacWest’s demise and sale last summer, Ares Management acquired a $3.5 billion portfolio of specialty loans. The $17 billion in mortgages acquired from Signature Bank’s collapse in December were bought out by Blackstone and the Canada Pension Plan Investment Board.
There is an estimated $25–40 trillion worth of asset-based financing in the economy. In the long run, private-credit executives aim to secure approximately 25% of that.
This trend is still in its early stages, and the majority of the loans are still provided by banks. Due to customers taking more time to pay off their bills, U.S. banks extended more credit last year.
This week, Moody’s Ratings released a report predicting that a handful of huge, powerful asset managers will hold an increasingly bigger share of the lending market. They will have much more economic clout as a result of this.
A growing number of private funds have partnered with insurance firms to increase their purchasing power. Also, funds are borrowing money from banks to increase returns, and those same institutions are buying risk from them using complicated instruments. One example of this is JPMorgan Chase.
In November, Senator Sherrod Brown (D., Ohio), who chairs the Senate Banking Committee, requested that the Federal Reserve and other authorities evaluate the dangers that private credit presents to the American financial system. Opinions from regulators have been divided.
The expansion of private funds was largely driven by the tightening of banking regulations. Financial institutions were hit hard by a July plan that would have increased the amount of capital they were required to set aside against “risk-weighted assets,” which was a reaction to the regional-bank crisis. Additionally, it significantly reduced the allure for banks to keep asset-based loans. Known as Basel Endgame, the idea is set to undergo revisions, as the Federal Reserve revealed this week.
Angelo Gordon’s head of asset-based financing, T.J. Durkin, sent a number of his employees on a routine mission to visit local financial institutions in search of new business last year.
He remarked that banks are now providing us with interesting assets to invest in, and that this has inverted the coverage model.
