Why banks are desperate to get into private credit

By News Room On Nov 25, 2023

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One note to start: Today’s edition is a shorter than usual Friday newsletter. For our US readers, we hope you had a nice Thanksgiving.

-The DD team

In today’s newsletter:

This Thanksgiving, banks were thankful for private credit

Find someone who loves you like banks love a fee-rich fad. And there are few hotter fads in finance today than private credit. What artificial intelligence is to tech, private credit is to Wall Street.

Blackstone’s president Jonathan Gray earlier this year said it was a “golden moment” for the fast-growing $1.5tn industry. Apollo Global Management’s Marc Rowan called it a “worldwide phenomenon”, and Ares Management’s Michael Arougheti sees “risk-reward characteristics that are as favourable as we’ve seen in many years”.

However, the growth of private credit is in large part supposed to be driven by the retreat of banks from commercial lending — “debanking”, as Rowan calls the trend. That’s why it’s so weird to see a lot of banks now scramble to get in on the private credit boom.

As our Alphaville colleague Robin Wigglesworth sarcastically noted earlier this week: “In a radical break from their business model of paying fines, lobbying and advising CEOs how to wreck their careers through stupid M&A deals, several banks are looking to break into the hot new phenomenon of lending money to companies.”

The latest bank looking to crack into private credit is Citigroup. It follows the likes of JPMorgan Chase, Barclays, Rabobank, Wells Fargo, Société Générale and Deutsche Bank. Some are primarily partnering with existing private credit players, or setting up their own investment funds, but others are putting significant capital behind their efforts.

Of course, the reality is private credit isn’t really analogous to traditional commercial banking. For the time being, it’s mostly a rival to traditional leveraged financing such as high-yield bonds and leveraged loans. That is the turf that banks are seeking to defend.

But at the same time, it’s increasingly clear that the biggest players have much bigger ambitions. As Rowan said on Apollo’s third-quarter earnings call:

“When I talk about private credit, I’m really talking about the secular change as a result of debanking. I start with the notion that everything on a bank balance sheet is actually private credit. What we’ve seen so far and what the press is focused on is levered lending, which, as I said, is a fraction of a fraction. I think we’re going to be talking about this for the next 10 years.”

Still, some eyebrows were raised at the Citi news over at Alphaville. As Robin wrote: “History repeats itself, first as tragedy, second as farce, and third as Citi blowing itself up on the Wall Street fad of the moment.”

The most audacious trade this year?

Corporate Japan is coming to terms with an uncomfortable truth. Sometimes, the barbarians capable of causing the most disruption are not the aggressive foreigners at the gate, but those born inside the castle who know its weak spots.

That’s the lesson to be drawn from a spectacular ding-dong between two of the country’s financial titans, 72-year-old Yoshitaka Kitao and 64-year-old Yoshiaki Murakami, the FT’s Leo Lewis writes.

Kitao is the founder of Japan’s largest online brokerage, SBI, an institution first set up inside Masayoshi Son’s SoftBank but which has long since separated from the company.

Murakami is a bureaucrat-turned-hostile takeover pioneer who was convicted of insider trading in 2007.

They are clashing over the future of Shinsei Bank, a battle that leaves both at risk of humiliation.

Kitao and SBI want to take control of the lender. But the Japanese taxpayer is a major shareholder in Shinsei Bank via two government institutions that cannot sell for less than ¥349bn ($2.34bn), or about ¥7,450 per share.

That limit has triggered a complex series of chess moves.

The upshot: Murakami is holding a stake for which he paid ¥56bn and which will be worth about ¥150bn if Kitao has to buy him and the government out at the minimum price.

Even if he’s quietly taken out at a lower price, it stands to be one of the most audacious trades this year.

Job moves

Billionaire activist Christopher Hohn’s TCI has opened an office in Abu Dhabi, joining a wave of groups betting on the United Arab Emirates. Bronwyn Owen, the group’s head of investor relations, is relocating from New York to run the office.
Shreyas Bordia, Citi’s head of energy investment banking for Europe, the Middle East and Africa, has left the firm, eFinancialCareers reports. Citi declined to comment.
Jefferies Financial Group has hired former Credit Suisse bankers Yik Ley Chan and Javier Lee as head of Asia private credit and vice-president of the unit, respectively, Bloomberg reports.
Kirkland & Ellis has named Ceinwen Rees as a tax partner in London. She joins from Macfarlanes.
The Phoenix Group has named Lloyd’s of London chief investment officer Eleanor Bucks as a member of its board, effective December 1.
Executive search and advisory group Fredriks has named former Warburg Pincus Japan CEO Tetsuya Fukagawa to lead its operations in the region.

Smart reads

How Musk fell down the rabbit hole A tweet by Elon Musk endorsing an antisemitic theory comes after years of increasing engagement by the billionaire with extremist content, Bloomberg reports.

How OpenAI is run The start-up’s recent travails have cast a spotlight on its unconventional corporate non-profit governance structure. A finance journalist-turned-AI founder explains how it works in an op-ed for The Information.

FTX founder Sam Bankman-Fried is adjusting to life behind bars in a Brooklyn jail as he awaits sentencing, sharing crypto tips with guards and trading bagged fish as currency, The Wall Street Journal reports.

News round-up

Chinese shadow bank Zhongzhi faces $36bn shortfall after ‘management ran wild’ (FT)

British tech tycoon Lawrence Jones guilty of rape and sexual assault (FT)

Hipgnosis seeks new auditor as it faces legal action (FT)

Binance’s crypto dominance under threat after loss of founder Changpeng Zhao (FT)

Virgin Money profits hit by rising bad loan provisions (FT)

How Silicon Valley reunited Sam Altman and OpenAI (FT)

IPOs: start-ups that missed their moment risk alienating employees (Lex)

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