Why private credit still needs public markets

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The writer is co-head of global credit and markets at KKR

Today’s credit landscape looks very different than it did a decade ago. One of the formative changes has been the rise of lending outside traditional banking. This alternative lending has grown nearly six times across public and private markets over the past 15 years.

Notably, the private credit market has expanded to become an asset class worth about $1.5tn, rivalling the syndicated loan market in size. It has become a popular narrative that this growth comes at the expense of the public syndicated markets both in loans and bonds.

However, the reality is that relationship between these markets is much more symbiotic than zero sum — private credit still needs the public markets in order to thrive, evolve and fuel the main street economy.

The supply of credit from commercial banks has declined by more than 50 per cent in the wake of the global financial crisis, the Covid-19 pandemic and the 2023 turmoil in banking. Private credit has increasingly stepped in to fill this gap and has become a preferred financing option for many market participants.

For a sizeable number of corporate issuers and sponsors, private credit has offered greater speed of process, flexibility and certainty of execution amid a volatile market environment. As a result, in the past 18 months more than 90 per cent of leveraged buyouts globally were financed by private credit.

However, not every financing is necessarily a fit for private credit and over-reliance on it could have consequences for the asset class and markets more broadly.

Syndicated markets provide an abundance of data from daily trading activity that is essential to price discovery, as well as more detailed lender information through the credit rating process. These inputs play a key role in providing comparable pricing metrics for private credit transactions.

Having fewer avenues for obtaining financing is also one of several factors that have contributed to a decrease in mergers and acquisitions. And we have already seen several transactions transition from private credit funding to standard syndicated deals. If syndicated markets had not been so challenged, sponsors may have preferred to secure a hybrid solution to their financing needs.

The symbiosis of the public and private markets becomes especially clear in subordinated parts of the capital structure. Syndicated markets serve as critical sustenance for junior debt which is ranked lower down the rankings of creditor protection. They offer options to companies or deal sponsors to avoid issuing equity or to create more flexibility in the structure of their deals or to protect cash balances. Without syndicated markets being fully open, these parties may shy away from junior debt as they are currently doing.

Diversification of capital is also healthy for the market. Private credit managers have been raising billions of dollars of “dry powder” — commitments from investors to invest in funds — for direct lending and junior debt funds globally. More than $30bn was raised in 2022 for junior debt alone, the most in a single year since 2016. But although record amounts of private credit capital have been raised in recent years, this has been among a more concentrated group of lenders compared with the syndicated market.

This group is now reaping the benefits of the most lender-friendly environment we have seen in more than a decade. On the back of interest rate rises, there has been a dramatic increase in cost of capital for the leveraged finance market that will test the economic stamina of many companies.

It will ultimately take time for the public markets to fully reopen. It will require renewed confidence in the ability to execute financings, along with a line of sight to the end of rate hikes and rising cost of capital.

What we should recognise though is that private credit and syndicated markets are not competitors — they are complimentary. A vast variety of financing solutions is needed to address issuer size, sector and financial condition.

Simply put, just because there has been a lane closure in syndicated markets over the past year and a half due to market volatility does not mean this has become a one-way road.

Together private credit and syndicated markets enrich the financial system, touch a wider range of constituents and provide critical access points to credit for businesses to continue to operate and grow. This is not a zero-sum game.

 KKR and its funds are borrowers, investors and arrangers of public and private corporate debt