Private Credit Has Had Its 15 Minutes of Fame

Just as private credit is becoming an asset class of its own and private equity houses are finding a new revenue stream away from their bread-and-butter buyout businesses, this burgeoning part of leveraged finance is losing steam.

Direct lending has been its crowning achievement. Credit was not only extended to smaller companies that had limited access to public markets, but to back big buyout deals that in the past relied on banks to arrange syndicated loans or junk bond issues. Firms such as HPS Investment Partners Llc, a spinoff from JPMorgan Asset Management in 2016, were among private lenders that single-handedly underwrote billion-dollar loans. Last year, direct lending funds managed more than $550 billion, up from $95 billion a decade earlier, according to PitchBook. Investors in these funds, in turn, were able to earn 12% returns.

But the conditions that led to such huge success are unwinding. After two years of ceding turf to direct lenders, investment banks, which are the public credit markets’ gatekeepers, are striking back.

So far this year, 21 companies managed to refinance $8.3 billion of debt that was previously provided by private lenders via broadly syndicated loans, data from PitchBook show. Among those was Caliber Collision Inc., a B-rated auto-repair chain owned by private equity firm Hellman & Friedman Llc. The company retired expensive second-lien debt in January, using part of the $4 billion proceeds from bond and loan sales.