Private credit firms want more than corporate lending. The largest are laying the groundwork to finance everything from auto loans and residential mortgages to chip manufacturing and data centers in an effort to swell the size of the market by the trillions.
It’s part of a race to grab a bigger share of a universe of potential investments that Apollo Global Management Inc. has said could be as large as $40 trillion. The staggering estimate is tied to a boom in private investment-grade debt related to infrastructure and asset-backed finance. Those areas will be top priority for firms next year, according to 10 managers interviewed by Bloomberg News.
“There is a shift in the world’s understanding that there’s a lot more beyond direct lending,” said Michael Zawadzki, the global chief investment officer at Blackstone Inc.’s credit and insurance unit. “This ecosystem of private investment-grade is a massive market with a huge tailwind.”
Data provider Preqin currently pegs the size of private debt assets under management at around $1.6 trillion, a number focused on corporate debt strategies. Hitting the industry’s expansion goals would require a strong consumer and the materialization of lofty projections surrounding artificial intelligence. And with so many firms focused on the same areas, too much competition could also hurt plans.
While next year will show whether a push into asset-backed finance and infrastructure debt is accelerating, the industry will have to prove in the coming years how large the appetite is for this product shift.
Though high yield-focused corporate direct lending has attracted most of the market’s attention and capital in recent years, its growth is slowing, leaving firms needing to permeate new areas to expand.
“The asset-backed business is probably sitting where the direct lending market was sitting five to seven years ago,” said Dan Pietrzak, the global head of private credit at KKR & Co., which estimates the total addressable market for credit at around $40 trillion, across public and private. For context, the S&P 500’s entire market capitalization is about $50 trillion.
Private debt has increasing opportunities to take market share in these spaces as banks continue on a quest to become more asset-light as a result of stricter post-Global Financial Crisis regulations. A second Trump administration might soften some requirements but isn’t expected to change this long-term shift.
“The fundamental model of a bank is changing from lending to earn a return to lending to make fees and attract deposits, and I don’t think that paradigm shift is changing anytime soon,” said Loris Nazarian, an assistant portfolio manager at Oaktree Capital Management’s private assets business.
Investors, or limited partners, are also driving the push, as part of an effort to diversify into and within the private markets. Investment-grade debt is also in high demand from insurance companies looking for safe, but lucrative, places to park vast amounts of capital. Private credit firms are also racing to scale up and become one-stop shops for all types of investing for their LPs.
Consumer Growth
Asset-backed finance refers to packaging together pools of loans or assets that generate cash, and then lending against the recurring cash flow of that portfolio. The scope is broad: everything from auto loans or mortgages to music royalties or trade receivables. Small business loans and income streams from mobile phone towers or data centers can count, too.
Traditionally, regional banks have been big buyers of these types of loans, sometimes providing financing against the pools or by repackaging them into securities of varying risk and size. That changed in 2023 as banks and credit unions retreated from the market following the demise of Silicon Valley Bank. Although some are back to financing this space, that gave an opening to private credit lenders.
Banks also historically made many of these types of consumer and commercial loans, especially mortgages. But as regulators pushed banks to de-risk, many offloaded existing loans and pulled back from new ones.
KKR estimates that about $500 billion of additional assets will leave banks and move to private funds. The firm expects the private asset-backed finance market to grow to $9.2 trillion by 2029, up from about $6.1 trillion currently.
“Demand from banks for that capital continues to evolve and their box continues to get more narrow,” said Greg Leveto, a portfolio manager and partner at Oak Hill Advisors. “For things that fit in the box, their appetite is still substantial, but the box is historically small and shrinking.”
ABF allows private credit investors — insurers, pensions and others — to provide investment-grade equivalent loans but see more yield, given the direct origination and illiquidity of deals. This “hunt for yield” is expected to continue and investors can “get paid above a regular-way investment-grade bond,” said KKR’s Pietrzak.
Some firms including Apollo, KKR and Blackstone already have scaled private ABF businesses they plan to expand, while others are now ramping up.
Sixth Street Partners expects to grow its ABF assets under management over the next five years to make up a significant portion of its investments, said Co-Chief Investment Officer Joshua Easterly. The firm is currently focused on consumer products like mortgages and car loans and looking to expand in commercial lending.
Residential housing is another frontier for private credit funds, especially loans to consumers with good credit. One area of focus for Carlyle Group Inc. is targeting pools of capital with exposure to people who have significant home equity, such as through home equity loans, solar loans and auto loans, as they are protected from inflation, said Mark Jenkins, its head of global credit. Blackstone is looking to expand further in products such as home efficiency loans and residential solar financing, according to Zawadzki.
Goldman Sachs Group Inc.’s asset management arm started expanding its asset-backed business in 2023 to outside clients, especially insurance companies, and expects to see significant growth across financial technology, consumer credit, commercial real estate and small business financing, according to its global head of private credit, Greg Olafson.
Others have made acquisitions. Blue Owl Capital Inc. purchased Atalaya Capital Management this year to gain the personnel and sourcing channels needed to enter that space, said Co-President Craig Packer.
One risk that comes with expanding into asset-backed finance is that the market is still rooted in the banking model, which unlike asset managers has historically moved risk instead of owning it through a cycle, said Sixth Street’s Easterly.
“ABF broadly is not grounded in that investor-first kind of storage business mentality,” he said. “People without that risk getting this really wrong, so you’ve got to build with that investor-first mindset.”
Infrastructure Boom
The numbers get even bigger when including infrastructure debt, an area propelled by interest in renewable energy and soaring demand for data centers to support the artificial intelligence industry. As more equity is pumped into these projects, transactions will need supporting debt.
“There’s this fundamental shift in the types of investment projects that the US economy has been bankrolling and that’s creating an obvious need for capital,” said Rob Bittencourt, a partner in Apollo’s credit business.
Many manufacturing avenues are up for grabs, including semiconductors, green energy and electric vehicles, and are often supported with federal money from the Chips and Science Act and the Inflation Reduction Act, according to Bittencourt.
“You’re talking about major swaths of financing in the US economy,” said Packer at Blue Owl, which struck a $1 billion deal to buy infrastructure fund manager IPI Partners in October.
Banks will continue to play a role in this space, but often only lend at the top of the capital structure, leaving asset managers opportunities to provide junior capital or unitranche deals, said Ares Management Corp.’s head of credit, Kipp deVeer.
“Banks will just take a safer, lower-leveraged approach to get exposure to the assets that’s more friendly from a capital treatment and regulators viewpoint,” deVeer said.
Existing markets for bank-led project finance, investment-grade bonds and public structured finance won’t be able to meet the rapid growth projections, according to Bittencourt. And traditional debt financing often has rigid structures, but new projects need more flexibility — for example, deferring cash interest until a facility is up-and-running.
Increasingly, LPs want to work with one manager with broad capabilities across asset classes or parts of the capital structure, which allows them to rotate across strategies as the relative value changes over time, in both public and private markets, Blackstone’s Zawadzki said.
“The ability to invest across everything within the credit complex is where the world is going,” he said. “For people who say the golden age is over – we think it’s just the beginning.”
Bloomberg News is tracking corporate loans originated by private credit firms around the globe in the Private Credit Loan Monitor.
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