Private equity firms step up plans to edge banks out of low-risk lending

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Private equity firms including Apollo Global, KKR, Blackstone and Brookfield are accelerating efforts to make low-risk loans, encroaching on territory dominated by banks and public debt markets.

New York-based group Apollo on Thursday increased its long-term forecasts for its lending business, telling shareholders it expected to be able to originate more than $200bn a year in new loans, up from $150bn previously. This compares with $97bn issued last year including to investment grades European group Vonovia and Air France-KLM. Volumes reached a record $40bn in the first quarter of 2024, it said.

Apollo co-president Jim Zelter said US economic growth, buoyed by increased public and private spending on infrastructure projects ranging from semiconductor fabrication plants to clean energy projects, was fuelling huge demand for loans.

“When you think about what’s going on domestically . . . what’s going on in electric vehicles, there are many, many investment grade companies that are going to be confronted with massive growth initiatives,” Zelter said. “It’s not obvious that they should do it through the traditional channels of investment grade public debt or equity.”

The world’s largest buyout groups, whose ascent in the fund management industry was underpinned by the use of junk-rated loans, are placing low risk lending at the heart of their growth plans. Investment grade loans are growing attractive, especially to those firms that have acquired large insurers fuelling a perpetual demand for high earning investment assets.

The increased optimism from Apollo comes as the firm, which manages nearly $700bn, said it was registering large demand to issue high-rated loans that will be purchased by its insurance arm Athene and other independent insurers.

By comparison, JPMorgan Chase had $699bn in non-consumer loans outstanding at the end of the first quarter, down $3bn on the prior three months, according to securities filings.

Jamie Dimon, JPMorgan’s chief executive, cautioned last month that fast-growing new financial products “often become an area of unexpected risk in the markets”.

“Frequently, the weaknesses of new products, in this case private credit loans, may only be seen and exposed in bad markets, which private credit loans have not yet faced,” he warned in his annual shareholder letter.

Other large private equity groups including KKR, Blackstone and Brookfield have also prioritised originating low risk corporate debts as they grow their insurance-related assets.

KKR last month told investors that lending to high-rated companies was part of a $40tn opportunity amid a “structural shift away from the traditional commercial banking model.”

Blackstone, which has struck investment management partnerships with large insurers like AIG and Allstate, said recently it was seeing a “dramatic increase in demand” from clients for the loans.

Jonathan Gray, president of Blackstone, said activity was rising for loans to infrastructure businesses, and those financing sustainable energy projects and digital communications.

“We believe there is a massive opportunity to deliver higher returns to clients with lower risk by moving a portion of their liquid [investment grade] portfolios to private markets,” Gray told shareholders last month.

Brookfield has also prioritised the asset class. The Financial Times reported last month that the Canadian investment group was in late stage talks to acquire Castlelake, a specialist in originating highly rated debts backed by aircraft. It has also recently raised a €10bn private investment-grade debt fund.

Last year, Apollo acquired the structured products unit of Credit Suisse shortly before the bank’s merger with UBS, taking ownership of one of the largest originators of high-rated asset backed securities. The unit, now called AtlasSP, has allowed Apollo to dramatically increase its debt origination activities.

The loans are not just feeding Apollo’s wholly owned insurance operation, Athene. Third party insurers have begun acquiring billions of dollars worth of such debts originated by Apollo in recent quarters.

Last month, Apollo struck a large strategic partnership with MassMutual, one of the largest US insurers, in which the Boston-based insurer would invest more than $2bn to gain a minority equity stake in AtlasSP, and commit to buying future investment grade-rated assets from the lender.

Apollo has built more than a dozen internal debt “origination” platforms that construct and issue high grade debts for its insurer Athene and other independent groups.

Additional reporting by Euan Healy

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