Jane Sheppard reporting on the intriguing turn of events in the finance world. The Global Financial Crisis, which resulted in millions of Americans losing their homes and jobs, marked a new dawn for the private credit industry.
Over the past several years, the challenges faced by U.S. banks have created a space for the private credit market to flourish. This pattern has been particularly noticeable in the wake of the Global Financial Crisis and the collapse of Silicon Valley Bank in March. Despite banks grappling with issues, the demand for capital among U.S. businesses has remained steady, paving the way for alternative lenders.
The Transformation of the Lending Industry
At the Fortune Future of Finance conference, Joshua Easterly, co-CIO and co-president of the global investment firm Sixth Street, shed light on the evolution of the lending industry. Having worked at Goldman Sachs post the Global Financial Crisis, Easterly claimed that the private credit boom was an intended consequence of the regulations implemented after the Crisis.
The policymakers aimed to shift the risk away from the taxpayers without stifling the economy by reducing credit. As a result, the private credit industry experienced substantial growth.
Private Credit: A Better Model?
Easterly suggested that the private credit industry presents a superior model for lending risk as it holds more capital for loans on balance sheets. This led him to a realization in 2009 that the lending sector had changed for good, prompting his shift towards private credit.
Carey Lathrop, partner and chief operating officer of credit at Apollo Global Management, echoed Easterly’s sentiments. He pointed out the challenges in achieving economically feasible outcomes in public markets following the GFC, further cementing the importance of private credit.
Historic Rise of Private Credit
The growth of private credit since 2008 has been nothing short of historic. Before the crisis, there were less than $400 billion in total assets and committed capital in private credit. Fast forward to 2023, and this figure has skyrocketed to $2.1 trillion, as per the International Monetary Fund.
The collapse of several regional banks in 2023, led by the tech startup-focused Silicon Valley Bank, further propelled businesses nationwide to rely on private credit amidst a liquidity crunch.
Greater Stability with Private Credit?
While Silicon Valley Bank grappled with rising interest rates that devalued its long-dated bonds, the operations of private credit tend to be more stable during tough times.
According to Apollo’s Lathrop, banks like SVB experienced a mismatch between long-term assets and short-term liabilities, leading to unrealized loan losses as interest rates surged. In contrast, private credit funds, which primarily use money from wealthy investors and institutions for lending, are less vulnerable to rising interest rates.
In light of this, Sixth Street’s Easterly posits the SVB incident as a testament to the resilience of the private credit business model, attracting a host of new clientele. This moment was indeed a milestone for the asset class.
