Tuesday, May 21, 2024

Private Equity Eyeing Consumer Debt: Unpacking the Shift towards Asset-Based Finance


Private Equity Sets Its Sights on Consumer Debt

In a bold expansion into the everyday lives of U.S. consumers, private fund managers including giants like Apollo, Ares, Blackstone, and KKR are delving deep into asset-based finance. This term comprises a wide array of debts, from auto loans and credit card obligations to real-estate mortgages and loans secured by tangible assets like fiber-optic networks. This diversification signifies a monumental shift towards capturing a significant portion of the U.S. economy’s financial activities.

The allure of asset-based finance for these private equity firms lies in its ubiquity and potential profitability. Research from Atalaya Capital Management predicts that the domain of consumer, equipment, and specialty lending handled by private funds could skyrocket from $350 billion to an impressive $900 billion in the ensuing years, not accounting for the vast residential and commercial mortgage sectors that these funds are also keen on acquiring.

Leading the vanguard is Apollo Global Management, under the stewardship of CEO Marc Rowan, who recently made a significant acquisition of a division from Credit Suisse—renowned for its asset-based finance prowess. This strategic move not only bolstered Apollo’s position but also led to a substantial increase in its stock price, benefiting Rowan and the firm’s investors greatly.

The gradual retreat of banks from certain lending markets, exacerbated by rising interest rates and regulatory pressures, has opened doors for private equity firms. With an unprecedented $1.5 trillion raised by the end of 2022 for private debt investment, these firms now find themselves in a prime position to deploy their idle capital, thereby generating lucrative fees.

Recruitment has been a key strategy for these asset managers, with KKR and Sixth Street Partners bringing in top talent from the banking sector to spearhead their asset-based finance divisions. The reduction in bank participation has, according to Sixth Street co-founder Michael Muscolino, created a gap that these funds are all too eager to fill.

Moreover, asset-based finance affords these firms the opportunity to cater to large institutional investors, presenting them with investment-grade credit options that are often more palatable than the junk-rated corporate debt that private equity is traditionally known for. Recent transactions underscore the growing trend: from KKR’s acquisition of billions in loans backed by recreational vehicles to Blackstone’s purchase of a substantial credit card debt portfolio from Barclay’s U.S. unit.

With the total asset-based finance market estimated between $25 trillion and $40 trillion, private credit executives ambitiously aim to capture a significant slice of this pie. However, it’s essential to note that the banking sector still plays a crucial role in providing consumer loans, indicating a competitive yet evolving landscape.

Moody’s Ratings has pointed to the increasing concentration of lending among a handful of powerful asset managers, forecasting their growing influence within the economy. Additionally, these funds are leveraging partnerships with insurance companies and inventing complex financial instruments to enhance their purchasing power and mitigate risks.

Yet, the rapid growth of private fund activity in asset-based finance has not gone unnoticed by regulators and politicians. Senate Banking Committee Chair Sherrod Brown has raised concerns about the potential systemic risks posed by private credit, prompting regulatory bodies to reassess the situation.

As private equity firms continue to forge ahead in asset-based finance, the landscape of lending is undergoing a transformation. The entry of these financial titans into consumer debt markets hints at a future where a significant share of lending may no longer originate from traditional banks but from this emergent consortium of private equity powerhouses.

Jordan Clark
Jordan Clarkhttps://www.businessorbital.com/
Jordan Clark brings a dynamic and investigative approach to business reporting. Holding a degree in Business Administration and a certification in Data Analysis, Jordan has an eye for detail and a knack for uncovering the stories behind the numbers. His career began in the bustling world of Silicon Valley startups, giving him firsthand experience in tech entrepreneurship and venture capital. Jordan's reports often focus on technology's impact on business, startup culture, and emerging

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