May 2024

Private debt: Asset-backed finance: Unpacking the structural shifts

May 30, 2024 | Amanda Lynam, Dominique Bly

Key Takeaways

In our recent publication, Private Debt: Exploring the Nuances, we outlined the various risk and return strategies encompassed within the general term of “private debt.” But as we emphasized at the time, much of that discussion was focused on a narrow avenue of lending: to middle market companies.

Private debt, in the eyes of many market observers, can also be defined more broadly as any financing that is originated, structured, and then held directly by the lender. This definition – which encompasses lending related to consumer debt, hard assets, commercial financing and intellectual property, among other categories – is estimated to be a $5.5 trillion market in the U.S., per an April 2024 Oliver Wyman analysis. We refer to this activity as “asset-based financing,” or ABF.

Roughly 34% of this $5.5 trillion market is currently financed in the “non-bank” channel, per Oliver Wyman, with the private credit industry’s current market share estimated to be $200-$300 billion. While the concept of diversification away from the bank lending channel is not new (Exhibit 1), over the past several months, market participants have focused on the potential for private credit lenders to play an increased role in ABF, potentially filling “financing gaps” from some banks’ more selective appetite to lend (as they may look to optimize the capital efficiency of their balance sheets). Indeed, recent news flow over the past several months has pointed to increased participation of non-bank lenders in this area, either through some banks’ sales of loan exposures, or defined origination/lending partnerships between bank and non-bank lenders.

In this piece, we provide some context around the potential addressable market of private ABF, as well as some of the structural shifts behind its growth. This includes assessing the degree of restriction in bank lending (in the U.S. and Europe), the types of loans currently on bank balance sheets, and the variation in economies’ bank lending reliance across regions. We also outline the growing appetite for such investments from one large participant in the global investing landscape: U.S. insurers, including the subset of insurers that are private equity owned.

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Exhibit 1: Banks’ share of lending has declined since the global financial crisis
U.S. bank lending to the domestic private non-financial sector (at market value), as a percentage of U.S. GDP

Chart of U.S gdp

Source: BlackRock, Bank for International Settlements. As of 3Q2023 (most recent).

Author

Amanda Lynam, CPA
Head of Macro Credit Research, Portfolio Management Group – Private Debt
Amanda Lynam, CPA, is Head of Macro Credit Research within the Portfolio Management Group - Private Debt. In this capacity, Amanda leads original market research across a range of asset classes, including global corporate debt markets as well as private debt, real estate and infrastructure lending.
Dominique Bly
Macro Credit Research Strategist, Portfolio Management Group – Private Markets

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