War of words heats up as private credit bosses round on banks
The war of words between banks and private credit ratcheted up on Wednesday, after a trio of bosses from private lenders rounded on claims their industry played a pivotal role in a string of recent debt-related collapses, branding it “misinformation”.
During a fiery evidence session in the House of Lords, executives from alternative investment giants Blackstone, Ares and Apollo said that far from causing the next credit crisis, their industry was helping prevent one, adding the lending landscape was safer now than the previous bank-dominated environment.
Tristram Leach, co-head of European credit at Apollo, told peers that banks by their nature had an “asset-liability mismatch”, which meant systemic economic risk posed by credit markets had been greatly “reduced by virtue of private capital playing a role alongside” them.
His comments were echoed by Daniel Leiter, global head of liquid credit strategies at Blackstone, who said “the system will be more stable whenever we do go through economic shocks, because now, away from just relying on the banking system, private credit can provide a source of financing through difficult times.”
“What is happening in private credit is safer… than on banks’ balance sheets,” he added.
Shadow banking concerns
Fears have been growing over the opaque nature of so-called shadow banks in recent weeks, after a string of high-profile corporate failures threw fresh scrutiny on the role they might play in a future credit blowout.
Car parts maker First Brands and subprime auto lenders Primalend and Tricolor all collapsed in a matter of days under ballooning debts, leading several heavyweights from the traditional banking sector to warn of shadow banks’ outsized role in global lending.
Last month, JP Morgan boss Jamie Dimon said that more “cockroaches” were likely to emerge in a credit downturn, telling an analyst call that some banks’ underwriting of loans to private credit “won’t be as good as you think”.
His remarks were followed by a similar salvo from Bank of England governor Andrew Bailey, who warned that behaviour being demonstrated in private lending was redolent to the subprime crisis that foreshadowed the Global Financial Crisis (GFC), and should set off “alarm bells”.
Private credit dials up attacks on banks
Leiter and Leach launched a robust defence of their industry’s role in the spate of failures, dialling up attacks on traditional lenders.
“There has been a lot of misinformation on this credit,” Leither told peers on the Financial Services Regulation Committee. “This was not a private credit origination.”
Apollo’s Leach added: “First Brands was predominantly financed in the public credit markets. It was predominantly financed by broadly syndicated loans… [and] off-balance sheet facilities, which, according to public reporting appear to have been held by banks.”
The comments represent a new high-water mark in an increasingly bitter spat between the two industries, driven largely by private credit’s unrelenting rise that has seen it go from an arcane element of finance to one of its fastest-growing sectors.
It had largely focused on lending to firms too distressed to secure finance from banks or public bondholders. But fuelled by 15 years of hyper-low interest rates after the GFC – and added regulations placed on banks – it has swollen to a $3 trillion (£2.5 trillion) industry.
Risks of financial breakdown
Its ascent has also sparked concerns over regulators’ ability to monitor its capacity to trigger systemic financial breakdown, as the loans alternative funds provide to companies are often kept private, and their terms not revealed to investors.
Those fears have led the Bank of England’s Prudential Regulation Authority – and the Financial Regulation Committee – to investigate whether the private credit industry should be regulated like banks.
Blackstone’s Leiter said such a move would be unnecessary, telling peers: “We’re not doing the same activities as a bank. Banks take deposits, anybody opening a bank account is expecting to be able to access that money at any point in time.
“They run a business model that is more levered… and they have an asset-liability mismatch. When someone trusts us with capital, they do months of due diligence. It’s specifically to invest in these strategies… [we] should be regulated differently.”