Some argue that warnings about private credit’s risks reflect not just financial caution but tension and competition between banks and private lenders.
Blackstone’s latest move tells the story. In November, the firm led a £1.5 billion ($2 billion) private-credit package to finance London-based Permira’s buyout of JTC plc: a transaction backed by a who’s-who of heavyweight private lenders including CVC Credit, Singapore’s GIC, Oak Hill Advisors, Blue Owl Capital, and PSP Investments, along with Jefferies. The deal, which spanned multiple currencies and combined senior loans with revolving credit facilities, is the kind of complex tie-up that was once synonymous with big banks.
But today, this is what the center of corporate finance looks like.
Private Credit Soaks It In
Private credit, no longer a dimly lit corner of the financial markets, is now the go-to route for blockbuster deals. Since 2010, the market has grown nearly seven-fold and, according to the Bank for International Settlements, has swelled into a $2.5 trillion global industry, putting it on par with the syndicated-loan and high-yield bond markets.
On the surface, private credit seems to be eating the bankers’ lunch. After all, only one of the firms that participated in the Blackstone deal—Jefferies—is a traditional investment bank. But the reality is more complicated. The rise of direct lending hasn’t eliminated the old guard, but forced banks and private-credit firms into an uneasy partnership, with each increasingly intertwined in the other’s success.
Jamie Dimon, Chairman and CEO of the US’s largest bank, doesn’t like it.
Dimon sounded the alarm on an October 14 call with analysts, warning of “cockroaches” lurking in opaque corners of the private credit market. That same day, Blue Owl Capital’s co-CEO Marc Lipschultz clapped back at Dimon’s “fear mongering,” putting the blame on the syndicated loan market, not private credit itself.
It’s an “interesting dichotomy,” says Prath Reddy, president of Percent Securities, an investment manager specializing in private credit. The players involved, he argues, are all in bed with each other anyway.
Yes, private credit lenders are largely unregulated and nontransparent about their risky line of business. And traditional banks may be regulated. But banks keep busy lending directly to private businesses and financing the private credit firms themselves.
“All the large investment banks also have major stakes in—and in many cases control over—asset managers that are competing with the existing private credit funds out there that they claim are eating their lunch,” says Reddy. “They’re trying to hedge that lunch from being eaten by playing directly with them.”
How We Got Here
As bank regulations tightened after the 2007-08 financial crisis, traditional lenders found their balance sheets constrained. This opened the door to non-bank lenders. Brad Foster, head of fixed income and private markets at Bloomberg, says this shift reshaped the entire corporate finance ecosystem.
Post-crisis, new regulations put real pressure on bank capital.
“As that happened, obviously more of what was that corporate borrow base shifted from what was traditionally bank capital into non-bank capital,” says Foster.
What began as a simple, one-to-one lending model quickly evolved. Direct lenders grew into “clubs” that mirrored the bank-dominated syndicates; their borrowers expanded from private, middle-market companies to public firms and even investment-grade issuers. Deals once destined for the syndicated-loan or high-yield bond markets increasingly migrated to private credit instead.
“It’s difficult to argue this hasn’t had an impact on banks,” Foster adds. “Large deals are being financed away from the public markets.”
Still, he notes, the relationship isn’t purely competitive. Banks and private-credit managers now frequently partner on transactions, blending capital from both sides. Sponsors today “will pick and choose whether to go to the bank market or the non-bank market:” a choice that didn’t exist at this scale a decade ago.
The result? Highly bespoke capital structures that entice sponsors and investors alike, due to the speed and flexibility with which deals can get done.
Private credit, for example, has helped private equity sponsors orchestrate leveraged buyouts. Notable examples include Vista Equity Partners, which teamed up with Ares Management to finance the $10.5 billion acquisition of EverCommerce. Similarly, Apollo Global Management relied on its private credit division to fund its $8 billion purchase of Ancestry.com, offering custom high-yield loans as banks hesitated in the face of rising interest rates. Additionally, Carlyle Group turned to Oaktree Capital Management for private credit to complete its $7.2 billion buyout of Neiman Marcus, as banks were reluctant to finance retail deals amid economic uncertainty.
By nature, however, the new system is less liquid, and back-leverage facilities can make restructuring more difficult.
So far, there have been no significant defaults or loan losses across the private credit portfolio, according to Matthew Schernecke, partner at Hogan Lovells in New York. But it’s uncertain “how great a risk a broader systemic shock may be if the number of defaults and loan losses are amplified in a significant way,” he adds.
“Banks try to hedge their lunch from being eaten by playing directly with private lenders,”
Prath Reddy, Percent Securities
‘Cockroaches’ To Blame?
The market got a whiff of what that systemic risk test would look like after the collapse of auto sector companies Tricolor and First Brands, whose bankruptcies highlighted private credit exposure’s vulnerabilities.
UBS had more than $500 million committed to First Brands through several of its investment funds. Even though its direct private credit exposure turned out to be relatively small, the situation was severe enough to spark a contentious back-and-forth over whether non-bank “cockroaches” were to blame, as JPMorgan’s Dimon suggested.
Hogan Lovells’ Schernecke sees both sides. On one hand, private credit deals are typically held rather than sold. This allows lenders to earn an illiquidity premium for concentrated risk and limited secondary market opportunities. This structure also enables fast execution; one or a few creditors can approve terms without broader market input.
On the other hand, underwriting standards can become compromised and looser documentation on large-cap deals can affect lower middle-market loans.
“Weaker loan documentation can lead to unintended consequences in private credit in which creditors are generally intending to hold their paper for an extended period and do not want to allow for significant leakage of collateral or value without their consent,” says Schernecke. “Given how fiercely competitive deployment opportunities have become, it is difficult for funds to push back on more ‘aggressive’ terms because they may be replaced by another fund to land the mandate.”
While most private credit funds will resist including the most egregious leakage provisions, being the first mover on any specific issue is difficult when other funds may be more willing to be flexible, he adds.
Banks’ concerns are partly competitive. Private credit has captured significant market share in middle-market and even large-cap lending, prompting Dimon and other executives to view it warily—while also getting cozy with their rivals.
What’s Next
As Percent’s Reddy notes, private credit’s growth—and its competition with banks—isn’t new. More than 15 years after the global financial crisis, bank lending shifted into “the hands of a few key players: Apollo, KKR, Blackstone,” he says. Today, they’re building out syndication desks and structuring loans just like the big banks did.
Reddy points to his former employer, UBS, as being “one of the first movers” when it came to adapting to the times. The bank began partnering with private equity firms and became more “sponsor-driven,” he says, since that’s where the opportunity lies for banks now. “I’ve seen the evolution firsthand.”
But if private credit’s flexibility is its strength, opacity is its Achilles’ heel. When banks originate syndicated loans, borrowers have regulatory oversight. Private credit funds don’t have to disclose much. If they put a deal on their balance sheet, no one knows the terms, the covenants, or even how collateral is verified, Reddy warns. That lack of visibility, he says, is why bank CEOs like Dimon can make ominous but unverifiable warnings.
“When Jamie Dimon speaks, the world listens,” Reddy quips. Dimon knows exactly how much exposure JPMorgan has to private credit funds, but must project vigilance for the sake of financial services in general.
When bank bosses accuse private credit funds of “eating their lunch,” then, Reddy isn’t so sure. At the end of the day, those private credit funds still have massive facilities with the banks, which have indirect exposure; they’re lending to all the largest lenders.
So, has lunch been eaten? Reddy wonders: “Maybe half-eaten.”