Banks, PEUs Join Hands for Private Credit Offerings

Big banks and storied private equity underwriters (PEU) are joining to offer credit to private companies. The Federal Reserve Bank put out a "Fed Notes" on private credit in February 2024.  It states:

Private credit or private debt investments are debt-like, non-publicly traded instruments provided by non-bank entities, such as private credit funds or business development companies (BDCs), to fund private businesses.2 Private credit is typically extended to middle-market firms with annual revenues between $10 million and $1 billion, but has grown rapidly in recent years to fund larger companies that were traditionally funded by leveraged loans.

The Fed piece closes with a section on Interconnections with Banks:

While bank lending to private credit funds appears moderate, there are growing interconnections between these two types of lenders. First, banks are increasingly partnering with private credit funds to fund new deals. Second, banks are progressively selling complex debt instruments to private fund managers in so-called "synthetic risk transfers" in order to reduce regulatory capital charges on the loans they make. Such instruments have limited transparency and pose hidden risks to the financial system, especially as the industry has yet to endure a prolonged recession. Relatedly, there is growing concern that tighter regulations such as Basel III endgame could intensify migration of credit from banks to private credit lenders. Considering borrower risk profiles, such substitution is less likely to occur to bank-held loans, and more so with syndicated leveraged loans. In such cases, banks stand to lose underwriting fees to private credit funds. These developments suggest that private credit will become increasingly important to credit market functioning.

Yes, lets count more on instruments with limited transparency that pose hidden risks to the financial system.  More, please!

Thank heaven the PEU boys have found more ways to make fees.  Recognize any of these names?

 

  

It's a who's who of people who speak directly to elected officials without designating themselves as lobbyists.  It's also the list of people who hate paying taxes.

My wise friend wrote regarding the Fed and private credit:

It's kind of sad when a regulator puts out a note of the risks of private credit and stands by as the PEU conductors drive their train off the tracks. The fact that they recognize banks provide a higher form of regulatory framework to establish loans is the first red flag. As you read through the report there are so many factors they minimize.

Once a PEU boy, always a PEU boy.  Right Jay?   Residual PEU holdings, nobody declares those....