Over the past decade, private fund managers such as Apollo, Ares, Blackstone, and KKR have risen to prominence in corporate finance, and they are now setting their sights on a significant target: the U.S. consumer.
These firms are aggressively expanding into “asset-based finance,” a broad spectrum of debt products encompassing auto loans, credit cards, real estate mortgages, and loans secured by equipment like fiber-optic networks. This type of financing touches nearly every sector of the U.S. economy, and accessing this market could bring substantial wealth to the fund’s executives and shareholders. According to research by Atalaya Capital Management, if asset-based finance by private funds continues to grow at its current pace, consumer, equipment, and specialty lending by these funds could surge to $900 billion in the next few years from the current $350 billion.
Leading this charge is Apollo Global Management Chief Executive Marc Rowan, who acquired a division of Credit Suisse last year, which was the largest producer of asset-based finance on Wall Street. Since then, Apollo’s stock price has surged by 60%, resulting in personal paper gains of around $1.2 billion for Rowan.
Rowan highlighted the global trend of individuals increasingly turning to the investment marketplace rather than traditional banking systems, speaking at an event hosted by the Economic Club of Washington, D.C. Private-equity firms began supplanting banks as the primary providers of corporate loans following the 2008 financial crisis and have gradually expanded into asset-based finance in recent years. While banks still dominate the debt market, they have been reducing their involvement.
The rising interest rates since 2022 have hit banks hard, resulting in significant losses and triggering failures at institutions like Silicon Valley Bank last year, followed by regulatory crackdowns. Fintech companies such as Upstart, which provide consumer and mortgage loans, have also faced challenges as they rely on borrowing from banks and credit unions.
Private fund managers seized an opportunity at a critical juncture, as they had amassed a substantial amount of capital for investment in private debt by the end of 2022. However, a significant portion of this capital, approximately $434 billion, remained idle, prompting the need for these fund managers to deploy it to generate fees.
To capitalize on this opportunity, asset managers have been assembling teams specializing in asset-based finance to originate and distribute such investments to their clients. Notable hires include KKR’s recruitment of Deutsche Bank’s structured-finance chief Dan Pietrzak in 2016 and Sixth Street Partners’ acquisition of Credit Suisse’s structured-finance head Michael Dryden in 2022.
According to Sixth Street co-founder Michael Muscolino, banks’ decreasing willingness to hold these assets has created space for private funds to become major players in asset-based finance. Moreover, asset-based finance allows these funds to expand their reach by catering to large institutional investors who typically avoid junk-rated corporate debt but are interested in consumer and mortgage loans packaged into complex instruments with investment-grade ratings.
A flurry of deals ensued, with private fund managers acquiring billions of dollars’ worth of loans and debt from various sources. For example, KKR purchased $7.2 billion of loans backed by recreational vehicles from BMO and bought up to $44 billion of buy-now-pay-later loans from PayPal. Apollo rebranded the Credit Suisse business it acquired as Atlas and provided “warehouse” credit lines to companies backed by assets such as freight ships and solar power projects.
Other major acquisitions include Sixth Street, Pacific Investment Management, and KKR acquiring Goldman Sachs’s consumer lending unit GreenSky, and Blackstone purchasing $1.1 billion of credit card debt from Barclays. Ares Management bought a $3.5 billion package of specialty loans from PacWest, while Blackstone and Canada Pension Plan Investment Board purchased $17 billion of mortgages from the liquidation of Signature Bank.
Private-credit executives aim to capture a significant portion of the estimated $25 trillion to $40 trillion asset-based finance market, with the trend still in its early stages. Moody’s Ratings highlighted the growing influence of large asset managers in the economy, as an increasing proportion of lending becomes concentrated among them.
Regulatory scrutiny of private credit activities has been mixed, with Senate Banking Committee Chair Sherrod Brown requesting regulators to assess the risks posed by private credit to the financial system. Regulatory changes, such as proposals to increase capital requirements for banks, have driven much of the increased activity in private funds. The Federal Reserve’s plan to revise the Basel Endgame proposal reflects ongoing efforts to address regulatory concerns.
As banks have become a source of attractive assets for private funds, the coverage model has shifted, with private fund managers actively seeking deals from regional banks and credit unions to invest in. This shift underscores the evolving landscape of the financial industry, where private fund managers are increasingly playing a significant role in asset-based finance and reshaping the dynamics of lending and investment.