In case you hadn’t heard, private credit is apparently having a “golden moment.” That’s how top Blackstone executives described the market this spring in a tagline that’s captured just how dazzled Wall Street is about this space.
Private credit is the hyped-up asset that’s become the finance industry’s darling as interest rates have risen to the highest point since the global financial crisis. And as banks — those big old traditional lenders — have had a year of turmoil, private money managers have stepped in, effectively positioned as banks without the same regulation.
“This is a great time for private credit. This is not a quarter that’s a great time for private credit; this is a secular change,” Apollo CEO Marc Rowan said last month. “Today we are seeing the best risk-reward opportunities we have ever seen in direct lending,” Blue Owl co-CEO Marc Lipschultz told Insider last December. Goldman Sachs research analysts told clients in June that they view private credit as “one of the most interesting growth themes within capital markets over the next several years.”
So it’s no wonder that through the past couple of years, working on and around private credit deals has become Wall Street’s career du jour. Private investment firms often hire from their competitors and investment banks, said Paul Heller, managing partner and co-leader of search firm Caldwell’s financial services practice.
“If I were to advertise an executive role in a private credit fund and an executive role in a bulge-bracket bank, the credit fund’s applications would be three times, four times that of the bank,” said Hannah Robb, associate partner at New York-based search firm Eastward Partners.
In a “perception matrix,” private credit is viewed more favorably than banking roles, Robb said. “It’s considered the most interesting, largely because money talks and the returns are there.” From 2005 to 2022, direct lending strategies measured by consultant Cliffwater reflect a 9% return while Bloomberg’s high-yield bond and aggregate bond indices show returns of 6% and 3%, respectively, in the same time.
While private credit has been booming, the same investment firms launching funds are offering eye-watering pay packages for restructuring experts to help in an eventual downturn.
Private credit is a $1.5 trillion market (including both assets and cash that investors haven’t yet deployed), up from $500 billion in 2010. Private credit is most often floating-rate debt — that is, debt where interest rates rise in concert with rate hikes. Asset managers large and niche are profiting from central banks’ historic path of policy tightening while the businesses they lend to risk struggling under the weight of higher interest payments in a slowing economy.
“These markets are weird, and there’s a tremendous amount of chaos in private credit. There are many firms trying to raise capital,” Heller of Caldwell said. “There is a lot of attention on retail investors allocating money to the space. So there’s a little bit of a talent frenzy at the moment.”
‘Unheard of’ salaries, while risks abound in the market
It’s worth noting what private credit is: we’re talking about debt and loans. This is not exactly new or tantalizing stuff. But who is lending out money, and who is becoming more powerful as a result, has shifted in recent years.
Banks have broadly pulled back on making risky loans since the financial crisis more than a decade ago, benefiting private investment managers like Ares, Apollo, Carlyle, and Blackstone.
Marco Acerra, a financial services-focused consultant at the search firm Spencer Stuart, said it’s been the case in past down cycles that banks retrench and alternative capital fills in the gap. “I see this as a normal continuation of that trend, except we have been in a low interest-rate environment for such a long time that it feels particularly pronounced,” Acerra said.
And people want in. Last week, the CFA Institute said it was adding a new private markets and alternative investments certificate that includes a course on private credit to meet growing demand among members. Private credit strategies like direct lending (which makes up the larget portion of private credit assets), mezzanine capital, and asset-backed lending demand specialized skill sets, noted Richard Fernand, head of certificate management at the CFA Institute.
Some business schools are seeing a subtle shift in where students are going. Nicholas Kalogeropoulos, senior associate director of employee relations for Columbia Business School, said there has been a steady increase in interest from firms seeking to recruit the school’s students for private credit positions in the past few years, though this is from a very small base as the space is nascent and private credit has not historically targeted MBAs.
Even by Wall Street standards, the private credit market is commanding large paydays, a theme magnified while firms increasingly seek out people specializing in restructuring for portfolio companies gone bad.
In demand, too, are private credit-focused investor relations roles, with competitive pay packages to match, said Sam Iles, executive director and cohead of distribution at asset management consultancy Alpha FMC. Acerra of Spencer Stuart said he isn’t hearing much demand from candidates necessarily choosing between banking and private credit roles at the executive level, where his team is active. But at junior levels, he senses that “banks are losing high-quality junior bankers to private credit roles, as opposed to the traditional buyout roles they might otherwise have favored.”
Robb of Eastward said that for private credit funds seeking workout talent in the past year, “I’ve negotiated packages that are more than $2 million, guaranteed for multiple years, which is somewhat unheard of.”
The demand for private credit extends to the attorneys these firms hire.
“For most of my career, attracting new attorneys to private credit was a challenge. They didn’t quite know what it was, were concerned about committing long-term, or oftentimes, viewed finance as a boring practice area,” said Mike Mezzacappa, partner and cohead of private credit at the law firm Proskauer. Proskauer’s private credit group now has 90 lawyers, 24 of whom are partners, working full-time on private credit. Evan Palenschat, a newer partner in the group, noted that more firms are starting to brand practices as “private credit” or “direct lending.”
The threat of defaults
The industry is grappling with what rising rates mean for the companies they have invested in, both on the debt and equity sides, including monitoring defaults.
Last week, KKR’s chief financial officer, Robert Lewin, said default rates are ticking up, though they are below their 10-year rolling averages. “Relative to expectations, I think it has been better across the board,” he said at a conference hosted by Barclays. Goldman Sachs research analysts noted in a June report that Moody’s forecasts the loan default rate to increase to a peak of 6% next year from 1.5% in the last two years.
Acerra of Spencer Stuart said default risks broadly are “somewhat tempered,” pointing to firms creating custom agreements with portfolio companies, known as covenants, to protect against default.
“That said, I expect more private credit lenders will need to be set up to handle restructurings and workouts in-house, which is a trend that we expect will accelerate,” Acerra said.
Private credit is an attractive career for people in financial services in part because “banks naturally have more capital constraints and private credit firms are not regulated in the same way,” Heller of Caldwell said. “But at some point, the market can saturate.”
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