Interact 2024: Blurring the Lines Between Public & Private Markets

Senior leaders from alternative asset managers and insurance shared how they make choices between public and private credit financing and carry out their investments, during a panel discussion entitled “Blurring the Lines Between Public & Private Markets”, which was moderated by Darren Thomas (Global Head of Lending Solutions, S&P Global Market Intelligence) at this year’s Interact conference in New York in October.

Sometimes it’s unclear whether there is a path to public syndicated financing or if a debt issue is better suited for private financing, a panelist said. Less developed companies are better suited for the private markets because they do not yet have sufficient scale or a business model that can justify going to the public debt markets. The public syndicated markets require audited financials for issuance which may not be possible for certain firms. The choice between public and private financing changes with the maturity lifecycle of the firm. It was interesting to learn that the least important factor for borrowers was financing cost.  From the panelists’ perspective, the long-term relationship, flexible financing terms, and ability to provide innovative solutions are taking preference over financing cost though the competitive nature of the private markets is certainly compressing spreads.

Deciding to go with asset-backed financing, comprised of portfolios of loans, leases and receivables, puts investors in contact with “things that you touch every day,” said one panelist, such as “credit cards, student loans, auto loans.” Today that can be extended to data centers -- even private equity interests – or anything else that can be pooled into a portfolio, they added.

While the asset-backed market did take a fall in the 2008 crisis, private asset-backed markets evolved in its place. Some even say private credit is now in a golden age. It has at least drawn talent and capital out of the banking world, a panelist said. Since banks are now contending with changing capital rules, private investment firms are spending more time working with banks to get “synergistic cooperation,” this panelist added.

“The assets are still very much being financed by the banks,” they said. “There has to be cooperation between private capital, public markets and the banking world. But it's just a question of who is doing what in that equation that is shifting.”

Another investment firm panelist said they offer clients a choice of solutions and can execute transactions in whatever market is most appropriate, public or private. They said they see it as a healthy competition between public and private markets to provide financing to issuers. Private credit, however, has a premium, they acknowledged. The premium is worth paying, in their view, because private credit provides a lot of value. The public markets have more attractive pricing terms for issuers seeking the lowest cost of capital.

With the explosion of private credit, the audience was curious about the inherent risk developing.  Having diversified portfolios is critical to managing systemic risk.  Another issue for private credit is that a portfolio has to be very large and robust, said the panelist who raised the possibility that the choice between public and private can be unclear. Second, third or fourth tier private credit shops won’t have great asset concentration or private credit exposure when well managed from a risk perspective. For smaller investment firms in private credit, this may not be the case.  If they have one or two investments fail, it can impact their whole firm due to concentration risks in a single company or within a broader sector, which typically wouldn’t happen at a well-diversified private credit firm, whose assets can be in the $100 billion range.

While ratings agencies are concerned about systemic risk in private credit, the panelists disagreed, saying individual firms have risks, but it’s not enough collectively to snowball and damage the private credit market.