Alts managers poised for private credit growth

“[Alts managers] will benefit from the meaningful growth in private credit as more borrowers turn to private, flexible, non-traditional debt capital and banks divest of non-strategic portfolios or increasingly partner with non-bank firms amid impending higher regulatory and capital requirements,” Fitch said.

Over the past 18 months, alts managers have taken advantage of banks looking to shed non-core assets.

For instance, the report noted that KKR & Co. Inc. and Kennedy Lewis Investment Management bought US$7 billion worth of recreational vehicle loans from the Bank of Montreal; Apollo Global Management, Inc. affiliates bought US$8 billion worth of Credit Suisse assets after it ran into distress and was ultimately acquired by UBS AG; and Blackstone Inc. acquired US$1.1 billion in credit card assets from Barclays plc.

“Private credit has grown as banks have been conserving capital and disposing of nonstrategic loan portfolios to right-size risk-weighted assets,” the report said.

At the same time, alts managers have been teaming up with banks on joint financing vehicles.

So far this year, Apollo launched a private lending program with Citigroup Inc., AGL Credit Management partnered with Barclays, and JP Morgan Chase teamed up with a handful of alts managers on a lending arrangement.

“In addition to direct lending partnerships, alt IMs are targeting asset-based finance and commercial real estate debt, areas that are increasingly deemphasized by commercial banks,” the report said.

Alts managers are also forming other joint ventures, including efforts to expand retail investor access to private equity and credit, as well as strategic partnerships, such as Brookfield Asset Management’s deal with Castlelake, Fitch noted.

Despite the improving growth environment, Fitch said alts managers’ investment performance “will continue to be challenged by increased competition, elevated geopolitical risks and uncertainty surrounding U.S. elections.”

“Loosening credit terms and increased complexity may also pressure returns, with private-credit defaults expected to increase amid slowing economic growth and still elevated rates,” it added.