(Bloomberg) — Banking giants that once had more ground to lose to the emerging world of private lending continue to find more ways — and a lot more money — to pump into the sector.
For years, the threat was that direct lenders would oust incumbents by luring customers away from the corporate loan business. Now, it seems the biggest US lenders have decided if they can't avoid that competition, they're going to get in on it.
Banks including Goldman Sachs Group Inc., Citigroup Inc. and Wells Fargo & Co . have announced plans to pool more than $50 billion to underwrite private loans in recent months, according to an analysis by Bloomberg. Some are offering investment clients more ways to get in on the action, with JPMorgan Chase & Co.'s asset management arm. seeking to acquire a private credit firm, Bloomberg reported.
“We can't ignore it,” Daniel Pinto, JPMorgan's president and chief operating officer, told investors this month. “We need to really embrace that and make sure we're properly positioned to participate in that market.”
While many banks have pointed to multibillion-dollar efforts, there have been a variety of approaches to capture interest. Some firms have built on long-established private debt franchises in their asset management units. Some have reserved funds from their balances. Some have partnered with other firms and will provide access to borrowers, or money, or both.
Deepening efforts towards private credit has the potential to make banks compete with their traditional lending banks. But in some cases, banks may find it more profitable to earn fees by taking money from investors such as pension funds and insurers to finance loans, rather than agreeing to put up money themselves and risk not being able to service the debt. in public markets.
The strategy also allows them to offer borrowers another option rather than risk losing those customers to another lender.
Read more: JPMorgan, Citi are copying from the private credit playbook
To be sure, the amounts are a drop in the bucket compared to the $1.7 trillion industry that private lending has become in recent years as asset managers such as Blackstone Inc. and Apollo Global Management Inc. have flocked to the growing asset class.
'Hell to Pay'
Even as they clamor to pour money into private loans, a chorus of bank chiefs have begun to issue warnings about potential underlying risks.
Citigroup Chief Executive Jane Fraser warned at an event Last month there was a risk of an increase in the number of insurers raising funds in direct lending opportunities.
“We are all aware of the risks,” Bill Winters, CEO of Standard Chartered Plc, told a room full of regulators at the same event. “As always, good things go too far and then get corrected. And it's our job as a bank and your job as supervisors to make sure that we don't apply when the tide goes out.”
JPMorgan's Jamie Dimon said he expects problems to emerge in private credit and warned that “there could be hell to pay,” especially as retail clients gain access to the booming asset class.
“Do you want to give retail customers access to some of these less liquid products? Well, the answer is – maybe, but don't act like there's no risk involved,” Dimon said this week. “Retail customers tend to go around the block and call their senators and congressmen.”
Why is private credit booming? How long can it last?: QuickTake
Low demand for credit
It is growing witness that banks are looking to win back some of the business they may have lost to direct lenders. Investment banks, including Goldman Sachs, are pitching joint refinancings of some of the riskiest types of private credit, Bloomberg reported this month.
Funds raised by Wall Street giants may face a shortage of places to put the money. High interest rates have reduced demand for borrowing across the US. Loan balances at the country's six largest banks are expected to grow by less than 1% in the second quarter, according to analyst estimates compiled by Bloomberg.
Dry powder, or the amount of money committed to the private credit funds it has yet to be decided, is on a record. Already, investors are worried it will prompt some fund managers to offer cheaper prices or adjust credit agreements to be more borrower-friendly.
“Deal demand is very strong,” David Mechlin, a portfolio manager at UBS Asset Management, said this month. “But the need for credit is not there.”