(Bloomberg) — Citigroup Inc . and Apollo Global Management Inc. are teaming up in the fast-growing private lending market, agreeing to work together on deals worth $25 billion over the next five years.
According to a statement first seen by Bloomberg, the two Wall Street heavyweights have reached an exclusive partnership to arrange financing for corporate and private equity clients. Mubadala Investment Co. and Apollo's insurance unit Athene will also participate in the venture, which will initially focus on North America.
“This is where the industry is going,” Apollo co-president Jim Zelter said in an interview, describing the relationship between private equity providers and banks. “Citi goes from being a very active M&A banker with a few tools to having the full toolbox.”
Citigroup and Apollo have the option to expand the deal, which covers only non-investment grade lending, beyond the initial target of $25 billion and expand its scope to include other regions. The program aims to create $5 billion in debt deals in its first year, according to Zelter.
The two firms have set one of the most ambitious targets to date in a link string between banks and private credit managers that is reshaping Wall Street and the capital markets.
Citigroup shares were up 1.82% at 10:45 a.m. in New York. Apollo shares rose 0.38%.
The two industries have long been seen as rivals in securing financing for companies more and more convergent. Banks are looking for ways to maintain their fee flows without tying up their balance sheets as they grapple with regulatory and capital requirements. Private credit managers, meanwhile, are under pressure to find new ways to source investment following the surge in record amounts of cash.
Read more: Banks Pump Billions More into Private Loans as Frenzy Grows
Citigroup will rely on its investment banking expertise to source new debt deals among its clients and will earn a transaction origination fee. Apollo and its partners will provide the money. The offering will become a third point in the bank's debt capital markets strategy, complementing its existing business of arranging loans and bonds for distribution in the public markets.
“We lose a number of private credit transactions,” Richard Zogheb, Citigroup's head of debt capital markets, said in an interview. “The great news for us now is that we can hold the job and provide that solution.”
Citigroup is chasing rivals to make a bigger push into the $1.7 trillion private lending industry — though each bank has taken a different approach. JPMorgan Chase & Co. has set aside at least 10 billion dollars of its own balance for direct lending. Goldman Sachs Group Inc. has been raising third-party capital through its asset management unit for private origination deals for years. Wells Fargo & Co last year teamed up with Centerbridge Partners to launch a 5 billion dollars fund.
Close ties
The deal between Citigroup and Apollo brings closer two firms that have long been intertwined on Wall Street. Zelter joined Apollo in 2006 after more than a decade at Citigroup, where he previously served as chief investment officer of a private equity division. Prior to that, he oversaw the bank's global high yield and leveraged finance business. Citigroup is a frequent underwriter of debt agreements for Apollo's private equity business.
Citigroup's Vis Raghavan, who joined this year to oversee all of the bank's traders after running JPMorgan's global investment banking franchise, is working to turn around performance in his division. The firm has jumped to become the No. 2 underwriter of investment-grade bonds in the US this year, behind JPMorgan, according to data compiled by Bloomberg. However, it has underperformed high-yield bonds and leveraged loans.
Apollo is one of the largest providers of private equity, with nearly $700 billion in assets under management at the end of the second quarter. Of this, more than 500 billion dollars are related to its credit businesses.
Chief Executive Marc Rowan has targeted a universe of more than $40 trillion of investable private credit assets, which include lending to private equity deals and large corporations – as well as financing for a wide range of asset classes from mortgages to music royalties.