Private credit space surges while loan demand slows

The private credit industry is booming with acquisition deals in the wake of the banking fallout earlier this year. Semafor Business and Finance Editor Liz Hoffman joins Yahoo Finance Live to break down how the lending landscape has changed.

Video transcript

JULIE HYMAN: Blackrock boosting its private credit business this week, acquiring London debt specialist Croesus Capital. The new partnership unlocking new opportunities for client investment in the booming private credit space. Private credit increasingly of vogue, it's a process that sees money directly lent to companies, bypassing banks.

Moody's projects the market will reach at least $2 trillion by 2027, more than doubling its value in just seven years. Liz Hoffman's a business and finance editor at Semafor. She joins us now. Hey, Liz, how are you doing? It's good to see you.

LIZ HOFFMAN: Good morning. Thanks for having me.

JULIE HYMAN: Yeah, we're watching this sort of boom in the credit market. At the same time over the past year, call it, there have been some questions raised about whether there are some risks inherent in the growth of this private credit market. What do sort of regular investors need to know about this space?

LIZ HOFFMAN: Yeah. This is, as you know, I mean, growing incredibly quickly, $1.4 trillion or so these days, doubling in the past four years with a lot of room to run, I think. But this entire industry basically cropped up since the last crisis in 2008 and so really has never been tested. Look, I mean, the people I talked to, these deals, I think, are underwritten more conservatively. There's less leverage.

But it's also been spread throughout the system, right? If you're thinking about risk, you want to think about it two ways. Is the piece of paper problematic, and then how widespread is it? And I think these are probably safer loans, but they are tucked in lots of different places. And consumers may have exposure to them, particularly through vehicles like BDCs, business development companies, which have gone public at a clip in the last 10 years, raised a lot of permanent capital from retail.

RACHELLE AKUFFO: And so as you look at the size of this market, are you seeing any sort of trends that we're seeing here, especially in the fallout from SVB and some of the traditional banking sectors?

LIZ HOFFMAN: Yeah, you noted the BlackRock deal, which I would say is actually adjacent a little bit to core private credit. It's mostly venture debt, probably going to pick up some market share from Silicon Valley Bank. And that's an asset class that I think has a lot of people very excited about it. But it's going to take a minute to recover from the collapse of SVB.

The interesting dynamic, I think, is banks, really sort of syndicated bank loans, or a bank underwrites this loan and then distributes it to its clients, really kind of shut down at the end of last year and has not really reopened at a serious level, some green shoots here and there. But the question to me is when banks sort of get their arms around risk again. And, remember, they're still kind of choking and digesting a bunch of LBO debt from the end of last year, Twitter, and some other deals like that, are weighing down their ability to play here.

My question is, how much of that market share shift is permanent, right? How much of it just goes back to the banks because they tend to be cheaper versus is this a real toehold? Is this a really new asset class in private credit that can stick around?

BRAD SMITH: What is-- what would you look to say that lending itself will outlast this next recession?

LIZ HOFFMAN: Well, there's two sides to lending, right? There's supply and demand, like everything else. But loan demand has been slowing as the economy slows. Those are pretty good proxies for GDP, and that has been trending down.

It's been offset by lower supply, which is banks kind of pulling back. And these private credit funds, which have been raised very quickly, taking a little time to get money out the door. So it hasn't really been-- it's a little chicken and egg, right? We haven't seen a lot of leveraged buyouts. So we haven't really had to test the availability of credit.

And then on the flip side, we haven't really seen one of these private credit deals go belly up yet. And I think there's a question about sort of how that will be tested in a bankruptcy process. It's sort of a little more unwieldy in one way because it's spread all over the place but also having more conservatively underwritten. So, look, one of these big club deals, where these direct lenders have all written, let's say, $100 million check is going to go bust, and we'll see kind of how well the business model holds up.

JULIE HYMAN: Liz, the most recent story you wrote is sort of a classic Wall Street turmoil at management at a company, in this case a company called Blue Owl, which resulted from the merger of two other companies. It's a publicly-traded firm. But it seems like there is a little bit of tension there. Tell us about it and what the implications are for the company.

LIZ HOFFMAN: Yeah, Blue Owl is, I think, the poster child of this huge boom in private credit. It was formed just two years ago, a merger of two kind of Wall Street superstar bands in their own right, Owl Rock, which was founded about five years ago by alums from Blackstone, KKR, Goldman Sachs, I mean, a real who's who, and had raised just tens of billions of dollars incredibly quickly, mostly to do this middle-market lending to finance these buyouts. They merged with a firm called Dyal, which had been spun out of Neuberger Berman. And their specialty is another hot area on the other side of the ledger, taking stakes in private equity firms themselves.

So these are two really fast-growing sort of edges of the private equity industry, which is just moving away from its roots in private equity. These firms are not buyout shops anymore. They are sophisticated alternative asset managers.

And this kind of Wall Street super band is breaking up. And so as I reported yesterday, there's kind of battle lines being drawn along the lines of that merger. And the Dyal founder, a guy named Michael Rees, is being pushed out and asked to resign by his partners from the Owl Rock side of the merger. And he has said, perhaps understandably, I'm not going anywhere.

I built this business. He built it starting in 2010 at Neuberger, and it's really his baby, and he doesn't want to leave it behind. So a lot of egos under one roof here, and I don't think we've heard the last.

BRAD SMITH: Semafor Business and Finance Editor Liz Hoffman, Liz, great to see you. Great to get some of the latest reporting. Appreciate it.

LIZ HOFFMAN: Thanks for having me.

BRAD SMITH: Absolutely.