Opportunity as Banks Retreat
Banks: The New Public Utilities
Following Silicon Valley Bank's failure earlier this year, banks have been less willing to make commercial loans. While this poses risk for the economy, there is a potential benefit: as banks retreat, it is opening the door for private lenders to step in and fill the void. Investors in these private credit firms are benefitting from the high interest rates they're charging corporate borrowers.
We recently had the privilege of discussing this dynamic with Apollo's Chief Economist, Torsten Slok. He notes that this window will ultimately close. You can watch or listen here:
The failure of Silicon Valley Bank and subsequent bank runs earlier this year were a shock and embarrassment for regulators and bank management. The not-surprising result is that banks are pulling back from commercial lending. This merely accelerates a trend that was already underway for years before: banks have been less and less willing to hold loans that involve risk.
Commercial Bank Loan Growth Has Slowed
Banks are slowly morphing into quasi-public utilities. Increasingly onerous regulatory capital requirements have made it more expensive for banks to hold commercial loans on their balance sheets.
Private Credit Gone Wild?
Skeptics fear private credit. We don't. We believe private credit represents a secular shift in the way that capital is allocated in our economy. It is here to stay. At least until bank regulators change their restrictions on banks holding risk on their balance sheets - if that ever happens. Call us skeptics that governments will ever relent in their growing influence over banks.
No doubt we'll be reading future articles about private credit gone bad. But saying "private credit is bad" is like saying "stocks are bad". Private credit encompasses a wide spectrum: from good lenders making low-risk loans to high-quality borrowers …. to bad lenders making high-risk loans to low-quality borrowers … and everything in between. Selectivity matters.
We believe that a thoughtfully constructed, diversified portfolio of private credit may offer better risk-adjusted returns than the S&P 500 going forward. Sending our wishes for a Happy Thanksgiving. We are grateful for you, our thoughtful clients and friends.
Yours in the Field,
Frank Byrd, CFA Steve Korn, CFA
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