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Private Equity, Now Featuring Less Equity
Exposure to the expanding world of private credit has been key for alternative managers
ByTelis Demos, WSJ
Nov. 10, 2023
Giants like Apollo APO 0.84%increase; green up pointing triangle, Blackstone BX 1.85%increase; green up pointing triangle and KKR KKR 2.01%increase; green up pointing triangle made their names in the business of private equity. But today, the thing that investors seem most excited about is growth in their private credit businesses.
Recent flows of money into what are now known as alternative-asset managers have often tilted toward alternative forms of lending and away from classic private-equity buyouts. Buyout fundraising has been slowed in part by the difficulty of exiting old deals. Real-estate funds have also been hit by worries about things like commercial property values.
But private credit, which offers many floating-rate instruments whose yields rise with rates, as well as other yield-generating alternatives to traditional fixed income, has seen a surge of attention. For example, gross inflows into nontraded credit vehicles aimed at wealthy individual investors are growing at an annualized pace of about 55%, according to analysts at Goldman Sachs, with many new vehicles launching in recent months. Inflows into real-estate vehicles, by contrast, are growing at a less-than-5% annualized pace.
“The greatest demand today is for private-credit solutions,” Blackstone President Jonathan Gray told analysts in October.
Recent share performance of alternative managers reflects this, too. Apollo and Ares Management ARES 1.95%increase; green up pointing triangle both have more than two-thirds of their assets under management in investments described as “credit” or “yield.” Their shares are top performers in the group over the past year, up 38% and 34%, respectively, in the past 12 months.
The question now, though, is whether investors might start to look for private-credit growth to slow—especially if interest rates stop rising and benefiting floating-rate private-credit loans. Perhaps real-estate or private-equity flows will then pick up. Already there has been an uptick in realization of past investments. And those looking toward future returns may see now as the right time to get into private-equity or real-estate opportunities, since times of stress are often when the best bets are placed.
But there are things happening that might keep the momentum going for private credit for a while longer. For one, the fates of these asset classes aren’t entirely separate. One part of private credit is so-called direct lending, which can involve funding buyouts. A rebound in buyout deals creates more lending activity.
There is also the potential of even more growth coming from outside of direct lending—which is probably what many think of when they think of “private credit”—including things that yield less but also carry less default risk than loans to heavily indebted companies.
Apollo Chief Executive Marc Rowan noted on its earnings call that some forms of private credit could be treated by investors less as alternative investments and more like fixed income. This would broaden their appeal. “The vast, vast majority of what we’re interested in private credit is actually investment grade,” he said. Some of those types of investments can be assets for the insurance and retirement companies that managers now own or partner with.
There is also the rapidly expanding opportunity to step in for banks, which need to slim down ahead of rising capital requirements and pressures on their earnings. Harvey Schwartz, the current chief executive of Carlyle Group CG 0.77%increase; green up pointing triangle, cited his experience as the chief financial officer of Goldman Sachs during prior big regulatory changes in banking when talking about the private-credit opportunity for banklike assets. “You’ll see a flurry of activity, but I really think this is a process that really plays out [over] two, three, four or five years,” he told analysts this week.
Ares, for example, manages more than $32 billion in what it calls “alternative credit.” KKR said that as of the end of the third quarter, it had nearly $50 billion of assets under management in its asset-based finance strategies, which create private alternatives to traditional securitizations. These are examples of the kinds of private credit that could step in for what banks do.
For private-equity firms, credit has been the story of the past year. It might be the story of the next few years too.
Write to Telis Demos at Telis.Demos@wsj.com
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