Private Credit Funds Move From Mergers to Timeshares and Car Loans

Since the fall of Silicon Valley Bank in March, banks across the US have been maneuvering to shore up their capital while deposits shrink and investors eye their balance sheets. The easiest way to do that has been to pull back on financing for small and midsize businesses as well as consumer credit companies such as buy now, pay later and auto lenders. That’s provided a huge opening for the new rising power on Wall Street: private credit funds.

These funds, which are similar to private equity firms but focused on lending to instead of buying companies, manage about $1.5 trillion.


Some are run by private equity giants such as Blackstone Inc. and KKR & Co., others by specialty finance shops such as Castlelake and Atalaya Capital Management. Private credit is already an important source of funding for corporate buyouts. Now the weakness of banks means there are deals to be had on investments in more Main Street forms of debt, such as asset-based loans, which can be tied to anything from auto financing to mortgages. “The stone has been thrown into the pond, we are watching the ripples as they come our way, and we are trying not to show the smile on our face,” says Joel Holsinger, co-head of alternative credit at Ares Management, referring to the opportunities in asset-based lending.

For years, regional banks were among the biggest buyers of consumer loans. They were also a cornerstone of stability for smaller companies hoping to grow. But all that is now over. At US banks below the top 25, deposits shrank by nearly $133 billion from the end of December to mid-July, on a seasonally adjusted basis, according to data from the Federal Reserve.

To retain capital, banks have begun selling many of the loans on their books. California-based PacWest Bancorp—which agreed in July to be acquired by Banc of California Inc. after being shaken by a drop in deposits—in June sold a $3.5 billion debt portfolio to Ares. It included consumer loans, mortgages and receivables on timeshares.

It isn’t only regional banks getting loan-shy, especially as the Fed discusses new rules requiring big banks to manage their balance sheets more conservatively. “Large US banks are also retrenching from consumer credit to just stick to their core clients, and this will accelerate if proposed additional capital buffers are implemented,” says Aneek Mamik, head of financial services at private lender Värde Partners.

Värde has purchased about $1 billion in consumer personal loans made by Marcus, an online banking arm of Goldman Sachs Group Inc., Bloomberg News has previously reported.

Private credit has been making inroads with financial-technology companies, becoming more embedded in the consumer economy. KKR bought as much as €40 billion ($44 billion) of buy now, pay later loan receivables from PayPal Holdings Inc. Atlas SP Partners, the credit unit Apollo Global Management Inc. bought from Credit Suisse Group AG, was part of a deal to buy a pool of consumer loans from a US credit union. Castlelake also agreed to purchase up to $4 billion of installment loans from online lender Upstart Holdings Inc.

Private credit funds’ willingness to offer borrowers more flexible terms than banks—not to mention their stockpiles of capital—have also gotten the attention of small- and midsize companies shopping for lines of credit or loans backed by their assets. “It’s a completely unfair fight,” says Randy Schwimmer, senior managing director and co-head of senior lending at Churchill Asset Management, which specializes in midsize companies.

Construction company Orion Group Holdings Inc. had a $42.5 million revolving loan with Regions Bank and other lenders. It’s been replaced by a $103 million financing deal with private credit shop White Oak Global Advisors, according to White Oak partner and President Darius Mozaffarian. When the independent filmmaker New Regency needed additional capital for new projects, it turned to private lender Carlyle Group Inc. as banks pulled back, says Ben Fund, managing director at Carlyle.

Configure Partners, a firm that helps corporate borrowers obtain financing, has already seen the shift. A year ago regional banks represented about a quarter of lenders in any given deal. Now they’re only about 15% of the total, with private credit filling the gap, says managing director Joseph Weissglass.

Conditions that benefit private lenders are worrying for the economy more broadly. Even before Silicon Valley Bank’s collapse, rising rates were making capital more scarce and putting pressure on already-struggling companies. “Lack of available credit is a concern—it would be bad for the consumer as well as small businesses,” says Dan Pietrzak, global head of private credit at KKR.

But private credit is unlikely to rescue everyone. Used-car dealer and subprime finance company American Car Center, which was backed by York Capital Management, reached out to private lenders at the end of 2022 when it was struggling to find traditional financing, according to a person with knowledge of the matter. It ultimately went bankrupt in March. A representative for York Capital declined to comment.

Other consumer finance companies may follow the same trajectory. When unable to obtain debt from banks or private lenders, they’ll end up closing their doors. That could leave consumers with fewer options to access credit for purchases from cars to houses. It’s already started to happen: A Federal Reserve survey in July showed that Americans are increasingly likely to get turned down when they apply for credit. “Ultimately, the prospect of less competition—and the need to make profitable loans—means consumer rates will inevitably rise,” says LibreMax Capital Chief Investment Officer Greg Lippmann.

The expansion of private credit into more parts of the economy also raises questions about transparency. The managers of the funds aren’t as closely watched by regulators as banks and there is less visibility on the performance of their investments compared with public markets. But increasingly for some borrowers, private credit is the only show in town.

Source from: Bloomberg