Bank-Private Credit Collaborations Reshape Middle-Market Lending Landscape

January 28, 2025
Bank-Private Credit Collaborations Reshape Middle-Market Lending Landscape

The financial landscape has undergone significant changes since the Great Recession, particularly in the realm of middle-market lending. One of the most notable trends is the rise of partnerships between banks and private credit firms, hedge funds, or asset managers. These collaborations have emerged as a strategic response to regulatory changes and market dynamics, offering new opportunities for both lenders and borrowers.

The Rise of Bank-Private Credit Partnerships

Regulatory Changes and Market Dynamics

The introduction of the Volcker Rule in 2010 marked a turning point for banks, restricting their leverage capacity and compelling them to retreat from aggressive middle-market lending. This regulatory shift created a vacuum that private credit firms were quick to fill. Many former bankers transitioned to these firms, contributing to a surge in global assets under management in private credit, which reached $1.62 trillion. The Volcker Rule, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, aimed to prevent banks from engaging in proprietary trading and excessive investment in private equity and hedge funds, thereby limiting their exposure to riskier assets.

As a result of these regulatory changes, banks have had to seek alternative ways to participate in middle-market lending without breaching the constraints imposed upon them. This has led to innovative partnerships with private credit firms, hedge funds, and asset managers. By leveraging the strengths of both parties, these collaborations allow banks to continue engaging in the lending market while adhering to regulatory requirements. These partnerships have also fostered a symbiotic relationship, where banks provide their extensive origination networks and private credit firms bring their underwriting expertise to the table.

Impact of Recent Events

The collapse of Silicon Valley Bank and the subsequent rise in interest rates in 2023 further accelerated the retreat of banks from middle-market lending. These events underscored the need for alternative lending solutions, making bank-private credit partnerships even more attractive. These collaborations allow banks to leverage their extensive origination networks while private credit firms handle the underwriting, particularly for leveraged loans that fall outside banks’ regulatory constraints. The recent turmoil in the banking sector has highlighted the vulnerability of traditional banks to market fluctuations and regulatory pressures, making the cooperative approach more appealing.

In this context, partnerships between banks and private credit firms have emerged as a viable solution to balance risk and opportunity. By teaming up with private credit firms, banks can maintain a presence in the lending market without directly holding large amounts of leveraged debt. This arrangement mitigates the banks’ risk exposure while enabling them to participate in lucrative lending opportunities. Furthermore, the expertise of private credit firms in underwriting and managing these loans ensures that the partnership can effectively address the needs of middle-market borrowers. These collaborative efforts are not only reshaping the lending landscape but also providing businesses with more robust financing options.

Attractiveness of Non-Sponsored Lending

Market Potential

The U.S. middle market comprises approximately 45,000 non-sponsored companies, presenting a significant opportunity for bank-private credit partnerships. These companies, often family-owned or founder-led, have traditionally faced challenges in accessing capital. The partnerships offer a viable solution, providing these businesses with the necessary funding while allowing banks and private credit firms to tap into a lucrative market segment. Non-sponsored middle-market companies typically lack the backing of private equity sponsors, making them more reliant on alternative financing sources to support their growth and operations.

Banks and private credit firms have recognized the untapped potential within this segment and are increasingly focusing their efforts on providing tailored financial solutions to meet the unique needs of these businesses. By offering flexible credit terms and customized lending structures, these partnerships enable non-sponsored companies to secure the capital they need to expand and innovate. This approach not only benefits the borrowers but also allows lenders to diversify their portfolios and mitigate risk by spreading their exposure across a broader range of industries and sectors.

Strategic Benefits for Banks

For banks, these partnerships represent a strategic way to reclaim lost market share in lending without violating regulatory boundaries. By holding minimal debt financing percentages or investing in private funds or business development companies (BDCs), banks can participate in the lending market indirectly. This approach not only helps banks navigate regulatory constraints but also enhances their lending capabilities. Through these collaborations, banks can leverage their extensive origination networks to identify and source potential borrowers, while private credit firms provide the necessary expertise in underwriting and managing the loans.

The strategic benefits of these partnerships extend beyond regulatory compliance and market share reclamation. By aligning with private credit firms, banks can also enhance their competitive edge in the lending market. These collaborations enable banks to offer a wider range of financial products and services, thereby attracting a diverse clientele. Additionally, the partnership model fosters innovation within the banking sector, encouraging the development of novel lending structures and credit solutions that cater to the evolving needs of middle-market borrowers. Ultimately, this cooperative approach allows banks to remain relevant and competitive in a rapidly changing financial landscape.

Notable Partnerships in the Industry

Wells Fargo and Centerbridge Partners

In September 2023, Wells Fargo and Centerbridge Partners announced a partnership focused on providing private credit to family-owned and founder-led businesses. This collaboration aims to make private credit attractive to Main Street businesses, leveraging Wells Fargo’s origination network and Centerbridge’s underwriting expertise. The partnership created Overland Advantage, a BDC with contributions from both firms and international investors like ADIA and BCi. By combining their resources and expertise, Wells Fargo and Centerbridge aim to address the financing needs of middle-market companies that have traditionally struggled to access capital.

The creation of Overland Advantage represents a strategic move to tap into the underserved segment of family-owned and founder-led businesses. These companies often face unique challenges in securing financing due to their lack of private equity backing. The Wells Fargo and Centerbridge partnership seeks to bridge this gap by offering customized credit solutions that cater to the specific needs of these businesses. With a focus on companies generating $25 million to $125 million in EBITDA, Overland Advantage aims to provide meaningful support to businesses poised for growth and expansion.

Citi and Apollo Global Management, PNC and TCW

Other notable partnerships include Citi and Apollo Global Management, and PNC and TCW. These collaborations target different segments of the middle market, leveraging the strengths of each partner. For instance, PNC’s extensive network of bankers facilitates origination, while TCW handles cash-flow term loans for companies with $10 million to $100 million in EBITDA. These partnerships demonstrate the versatility of the bank-private credit collaboration model, as each partnership can be tailored to address the specific needs and characteristics of different market segments.

The partnership between Citi and Apollo Global Management, for example, focuses on providing comprehensive financial solutions to middle-market companies across a range of industries. By leveraging Citi’s global reach and Apollo’s expertise in alternative credit, this collaboration aims to deliver innovative and flexible financing options that cater to the diverse needs of middle-market borrowers. Similarly, the PNC and TCW partnership highlights the benefits of combining a bank’s extensive origination network with a private credit firm’s specialized underwriting capabilities. This approach allows for a more efficient and effective lending process, ultimately benefiting both lenders and borrowers.

Deep Dive into Specific Partnerships

Oaktree Capital and Lloyds Bank

In July 2023, Oaktree Capital and Lloyds Bank formed a joint venture to cater to U.K. middle-market sponsored borrowers with EBITDAs between £10 million and £75 million. This partnership allows both entities to share capital structure responsibilities, enhancing Lloyd’s lending capabilities and providing borrowers with more robust financing options. The collaboration aims to address the specific needs of sponsored borrowers, who often seek flexible and tailored credit solutions to support their growth and strategic initiatives.

By leveraging Oaktree Capital’s expertise in alternative credit and Lloyds Bank’s extensive network and market presence, the joint venture aims to deliver a comprehensive and effective lending solution for middle-market companies in the U.K. This partnership also underscores the growing trend of cross-border collaborations in the financial sector, as firms seek to capitalize on opportunities in different markets. The success of this joint venture is expected to set a precedent for future partnerships between banks and private credit firms, further driving innovation and growth in the middle-market lending space.

Oaktree Capital and AVANA Companies

Another significant partnership is between Oaktree Capital and AVANA Companies, announced in August 2023. This U.S.-based collaboration focuses on commercial real estate, particularly in job-creating sectors like hospitality. By combining their resources and expertise, Oaktree and AVANA aim to provide targeted lending solutions that support economic growth and job creation. The partnership seeks to address the financing needs of commercial real estate projects that have the potential to generate significant employment opportunities and contribute to local economic development.

The collaboration between Oaktree Capital and AVANA Companies highlights the strategic importance of targeted lending in job-creating sectors. By focusing on commercial real estate projects in hospitality and other high-impact industries, the partnership aims to drive economic growth while mitigating risk through careful underwriting and asset management. This approach not only benefits the borrowers but also aligns with broader economic and social objectives, making it an attractive proposition for investors and stakeholders alike. The success of this partnership is expected to pave the way for similar collaborations in other job-creating sectors, further expanding the scope and impact of bank-private credit partnerships.

Industry Sentiment and Future Outlook

Increasing Popularity of Partnerships

Experts predict a rise in bank-private credit partnerships due to their mutual benefits. These collaborations have evolved from informal arrangements to formal joint ventures, fostering a greater understanding and smoother execution of lending processes. The establishment of new BDCs and formal filings with the SEC indicate a growing trend towards transparency and regulatory adaptation. As these partnerships become more structured and regulated, they are expected to gain wider acceptance and credibility in the financial markets.

The increasing popularity of these partnerships can be attributed to the complementary strengths of banks and private credit firms. By working together, they can offer more comprehensive and flexible financing solutions to middle-market borrowers, addressing the gaps left by traditional lending models. This collaborative approach not only enhances the lending capabilities of both parties but also contributes to a more resilient and diversified financial system. As more partnerships emerge, they are expected to drive further innovation and growth in the middle-market lending space, creating new opportunities for lenders, borrowers, and investors alike.

Foreign Interest in U.S. Direct Lending Market

There is a notable interest from foreign capital in the high-yielding U.S. direct lending market. Entities like ADIA and BCi have shown significant involvement, highlighting the attractiveness of these partnerships on a global scale. This foreign interest is expected to further fuel the growth of bank-private credit collaborations, making private credit more mainstream and accessible across various sectors. The influx of foreign capital not only provides additional funding sources for middle-market borrowers but also brings a global perspective to the U.S. lending market.

The involvement of international investors underscores the appeal of the U.S. middle-market lending segment, known for its robust returns and growth potential. As foreign capital continues to flow into this market, it is likely to drive further innovation and competition, ultimately benefiting borrowers by providing them with more diverse and competitive financing options. The success of these bank-private credit partnerships is expected to attract even more foreign investors, further solidifying the U.S. as a key player in the global direct lending landscape.

Conclusion

Since the Great Recession, the financial landscape has experienced profound changes, especially in the field of middle-market lending. A prominent trend that has emerged is the formation of partnerships between banks and private credit firms, hedge funds, or asset managers. These alliances are a strategic response to the regulatory shifts and market forces that have reshaped the industry.

As banks faced tighter regulations limiting their ability to extend credit freely, they sought new ways to maintain their competitive edge and serve their clients effectively. Partnering with private credit firms and other financial entities has allowed banks to navigate these constraints and continue lending. This collaboration has proved mutually beneficial, providing private firms with access to borrowers and banks with the ability to diversify and mitigate risks.

For borrowers, these partnerships have opened up new avenues for securing financing, often with more flexible terms than traditional bank loans. Middle-market companies, which often struggle to obtain funding from large banks, have particularly benefited from these collaborative efforts. By working with a mix of financial institutions, they can find the tailored solutions they need to support their growth and operations.

In summary, the evolution of middle-market lending since the Great Recession has been marked by the rise of strategic partnerships between banks and private credit entities. These collaborations offer a way to adapt to regulatory changes and market dynamics, benefiting lenders and borrowers alike with new opportunities and pathways for financial support.

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