Private credit seen as both friend and foe to US banks

US banks are facing questions about how the rising popularity of private credit funds is impacting their business.

Direct lending-focused funds' dry powder has reached $159.38 billion as of Jan. 29, according to S&P Global Market Intelligence. That figure has climbed every year since 2010, when it was just $7.87 billion, as demand for nonbank lending soars.

Bank executives during fourth-quarter 2024 earnings calls acknowledged that some clients are turning to private credit, but that trend may provide opportunities for traditional depositories.

Funds getting their share

The funds are typically raised by private equity firms, and they often finance middle-market PE-backed companies, Atlantic Union Bankshares Corp. President and CEO John Asbury said during a Jan. 23 earnings call. "First time we've really seen this in any meaningful way," Asbury said.

Atlantic Union has noticed that some of its clients, mostly those from the bank's government-contracted portfolios, use private credit to pay down loans, said David Ring, Executive Vice President.

Ring added that the financing is different from bank loans and Atlantic Union views the direct lending funds as "pseudo equity." The executive said the private funds are a positive for clients.

"It's a healthy dynamic to help customers grow and take out some of the riskier loans off our portfolio," Ring said on the call.

However, not every bank executive sees the development as a positive. Bank OZK Chairman and CEO George Gleason said consumers and business customers are pushed to private credit as banks tighten lending due to challenging regulations. Gleason added that it adds risk to the economy when less-regulated entities are providing more financing.

"We do hope to see is a rightsizing of regulatory restraint on the industry, which lets more and more of the credit needs of the country being met by the banking industry as opposed to a nonregulated, noncontrolled source of credit," Gleason said during a Jan. 17 earnings call.

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President Donald Trump's administration is widely expected to provide regulatory relief to banks, but their "competitors may also continue to benefit with limited oversight—such as private credit," J.P. Morgan analyst Vivek Juneja wrote in a Dec. 20, 2024, research note.

Some bank executives see room for private credit in the lending landscape, highlighting its growing influence. During PNC Financial Services Group Inc.'s Jan. 16 earnings call, an analyst asked how often the company competes with private credit for loans.

PNC Chairman and CEO William Demchak said he discussed this with other bank CEOs at a conference, and they all agreed that private credit hadn't financed a deal they were pursuing.

"We haven't seen a deal we've lost that we wanted," Demchak said.

Partnering up

Demchak added that PNC wants to prevent completely losing a potential client relationship to private credit, and that is one of the reasons it teamed up with asset manager TCW Group Inc. in 2024 to offer private credit solutions to middle-market companies.

Others have made similar moves to leverage the growth of private credit. Citigroup Inc. partnered with Apollo Global Management Inc. in 2024 to form a $25 billion private credit program, and Goldman Sachs Group Inc. is establishing an alternative origination group to provide coverage to its private credit and private equity clients.

The top 20 global private credit fund managers, led by Apollo, collectively hold more than one-third of the dry powder available to the asset class, according to a previous analysis using Preqin and Market Intelligence data.

In North America, Ares Senior Direct Lending Fund II DAC has the most dry powder among direct lending-focused funds as of the second quarter of 2024, followed by HPS Specialty Loan Fund V LP.

Citizens Financial Group Inc., which has a private credit-focused business, sees private credit funds as either customers or competitors.

"On private credit, they need to find opportunities where can they invest their funds, and so they can be a customer of ours. At times, they could be a competitor to us, but it's typically on more leverage structures," Chairman and CEO Bruce Winfield Van Saun said during a Dec. 10, 2024, conference presentation.