Private Credit Expands Focus to Consumers and Infrastructure

The world of private credit is evolving as firms seek to diversify beyond traditional corporate lending. The largest players in the industry are setting the stage to finance a variety of sectors, including auto loans, residential mortgages, chip manufacturing, and data centers. This strategic shift aims to enlarge the market, potentially increasing its size by trillions.

According to Apollo Global Management Inc., the universe of potential investments in this sphere could reach a staggering $40 trillion. This estimation is linked to the increasing demand for private investment-grade debt in areas such as infrastructure and asset-backed finance. Ten managers from prominent firms have indicated that these sectors will be priority areas in the upcoming year.

Shifts in Investment Strategies

Michael Zawadzki, global chief investment officer at Blackstone Inc.'s credit and insurance unit, noted a growing awareness about the diverse opportunities beyond direct lending. "This ecosystem of private investment-grade is a massive market with a huge tailwind," he stated. Currently, data from Preqin estimates the size of private debt assets under management to be around $1.6 trillion, mainly focusing on corporate debt strategies.

For firms to achieve their ambitious expansion goals, they will need a robust consumer base and the realization of optimistic projections surrounding technological advancements, particularly in artificial intelligence. Furthermore, with numerous firms targeting similar domains, competition may pose challenges to these plans.

The Rise of Asset-Backed Finance

Recent trends have shown that while corporate direct lending has attracted attention and capital, its growth trajectory is slowing. This decline has prompted firms to explore new areas for expansion. Dan Pietrzak, global head of private credit at KKR & Co., suggests that the asset-backed finance (ABF) sector is at a nascent stage similar to where the direct lending sector was five to seven years ago.

As banks adapt to stricter regulations following the Global Financial Crisis, they prioritize becoming more asset-light. This trend creates further opportunities for private debt to gain market share in the asset-backed finance arena. Loris Nazarian, an assistant portfolio manager at Oaktree Capital Management, elaborates on the changing business model of banks, which now focus on generating fees rather than lending for returns.

Consumer-Focused Financing

The concept of asset-backed finance revolves around pooling loans or assets that generate cash flow and then lending against these cash flows. This approach can encompass diverse loans, including auto loans, mortgages, music royalties, and trade receivables, among others. Traditionally, regional banks were major players in this market, but their appetite has changed in recent years, especially following the collapse of Silicon Valley Bank in 2023, creating openings for private credit lenders.

KKR anticipates that around $500 billion of bank-held assets will transition to private funds. Their projections indicate that the private asset-backed finance sector could grow from approximately $6.1 trillion to $9.2 trillion by 2029.

Expanding into Infrastructure Debt

The potential for growth in infrastructure debt is especially noteworthy. The rising interest in renewable energy and the demand for data centers to support the artificial intelligence industry has created a void that private credit can fill. Rob Bittencourt from Apollo’s credit business emphasized the shift in the types of investment projects being financed by the U.S. economy, highlighting the essential need for capital.

Major sectors like semiconductors, green energy, and electric vehicles stand to benefit from federal initiatives such as the Chips and Science Act and the Inflation Reduction Act. With banks potentially limiting their lending to safer, lower-leverage positions in this space, private credit providers will have opportunities to offer more nuanced financing options.

As firms like Blackstone and KKR expand their asset-backed and infrastructure-focused initiatives, the demand for broader investment capabilities across different asset classes is evident. There is a clear inclination among limited partners to collaborate with managers who can navigate various segments of the credit market seamlessly.

Credit, Finance, Investment