Private Credit as Explained by PwC Partner Mr. Nick Atkinson
~ Monday, September 30, 2024 Blog Post ~
CFA Institute’s Private Markets Webinar Series — Private Credit
I listened to the presentation about private credit of Mr. Nick Atkinson, Partner and Head of Debt and Capital Advisory at PwC last Thursday, September 19, 2024. I found him very insightful in discussing private credit, which I learned has become the most popular asset class in Asia and has gathered the strongest sentiment.
The event dubbed, “Private Markets Webinar Series: Private Credit,” was organized by the CFA Institute. Some of the speakers from the latter part of the presentation affirmed that Asia has raised US$200 billion in 2021, with private credit holding up relatively, and is the only asset class that has directly benefited from lower market liquidity and higher interest rates.
The private credit webinar’s speakers confirmed that the world’s largest private credit market is that of the United States, which is valued at US$10 trillion. Additionally, the US private credit market is thrice the size of Europe’s.
Meanwhile, the latter is thrice the Asian private credit market’s size. I also learned that private credit as an asset class is more prominent in the United States than in Europe. Private credit companies deal with complexity and have the capability to problem-solve and look for solutions compared to “plain vanilla-type” lending banks, per one of the webinar’s speakers.
Some of the latest developments in private credit
Based on the International Monetary Fund’s approximations, private-credit lending is a transaction form that has ballooned to over US$2.1 trillion in assets and committed capital in 2023. This lending type mostly involves private-equity companies letting middle-market companies borrow funds.
Moreover, according to Morgan Stanley research, private credit’s rapid-paced growth has witnessed the private credit market’s size expand from a value of US$875 billion in 2020 to US$1.4 trillion in 2023.
The private credit sector has been boosted by heightened market volatility and surging interest rates as borrowers look for the boosted flexibility that private lenders provide. Overall, the US private credit market’s dimension presently rivals the world of syndicated loans and high-yield bonds.
Plenty of investment banks have directly participated in the private credit business, like the Goldman Sachs Group, Incorporated, per a May 2024 MarketWatch report. The financial services company and multinational investment bank confirmed that it had closed its West Street Loan Partners V senior direct-lending fund with US$13.1 billion in capital commitments to deploy.
In September 2024, Apollo Global Management and Citigroup inked an exclusive accord to create a US$25 billion private credit, direct lending program, per a MarketWatch report. The agreement targets combining Apollo’s capital base with Citigroup’s capital markets expertise and banking client reach. Additionally, the two financial firms’ deal will consist of Apollo subsidiary Athene and Mubadala Investment Company as Apollo’s strategic partner.
Citigroup and Apollo Global Management cited that the private credit, direct lending program will at first be introduced in North America. However, they relayed that it will possibly expand to more regions and beyond the first US$25-billion range.
Apollo Global Management and Citigroup pointed out that their strategic program is for considerably enhancing access for corporate and sponsor customers to the private lending capital pool at a size and scale that can offer financing certainty in strategic transactions.
Meanwhile, Jamie Dimon remarked that JPMorgan Chase and Company could, one day, pour investment funds of up to US$200 billion in private-credit deals off its balance sheet. The multinational finance company’s chief executive officer affirmed that his group is confident they can contend.
Mr. Dimon relayed that they could put up US$200 billion or US$100 billion with their capital and balance sheet. He added that he is not afraid of the matter if it is a favorable credit, according to a May 2024 MarketWatch report.
Mr. Dimon also pointed out that he has been studying private credit. He cited that the asset class provides another choice for business customers to borrow funds at different terms compared to regulated bank loans like longer-life loans.
Mr. Nick Atkinson’s Professional Background
As an investor and data aggregator, I found Mr. Atkinson’s presentation quite interesting and I was able to get what I wanted from the webinar. He gave a sense of his view of the role private credit plays in the capital markets. Furthermore, the speaker explained what created an environment for growth in North America and Europe as well as what’s happening in his region today, which is Asia-Pacific.
Private credit is an interesting place to be, especially with professionals in the finance industry as Mr. Atkinson. He introduced himself as having private capital in general and private credit specifically as to where he has spent the last 32 years of his life. The PwC partner affirmed that he has worked for 32 years. He is a certified public accountant or CPA and describes himself as an “insolvency guy.”
Mr. Atkinson completed the Executive Education Program of Northwestern University — Kellogg School of Management in September 1999, per his LinkedIn profile. His skills comprise management, investment banking, leveraged finance, private equity, and finance. Moreover, Mr. Atkinson is proficient in portfolio management, corporate finance, capital markets, investments, and valuation.
According to Mr. Atkinson’s LinkedIn profile, he is prolific in restructuring, banking, fixed income, due diligence, structured finance, debt restructuring, asset management, financial modeling, mergers and acquisitions or M&A, and leveraged buyout or LBO.
Mr. Atkinson has been in Asia since 2021. What he does at this moment is run PwC’s business across the region, which raises capital for borrowers who themselves cannot raise alone without advice. He cited that their business is called debt and capital advisory, and they raise capital in all of its forms — from private equity through to public bonds — except for public equities where he remarked they would not go.
In terms of Mr. Atkinson’s background, prior to going to Asia, he shared that he worked for four global investment banks, to French, to North American, before finally ending up in his fifth, which was a Japanese mega-bank, MUFG. In all of these places, he pointed out that he was active and operational in some investment-grade, often-leveraged debt provision as principal. At MUFG, Mr. Atkinson ran some investment-grade structured lending businesses in Europe, the Middle East, and Africa or EMEA. Furthermore, in over that time frame, which is more than 20 years, the PwC partner confirmed that he has led more than 200 deals across Europe and North America before coming out to Asia.
In terms of Asia, in this region, Mr. Atkinson described his employer PwC as a market leader and very well-known for mid-market, mergers and acquisitions or M and A advisory work. In his business in debt and capital advisory, he relayed that they typically don’t touch that space as frequently. Mr. Atkinson said they are very active in large and complex debt and debt capital raises. At PwC, he said that they have raised something in the region of US$850 million in currency equivalent for a borrower in Indonesia. I also gathered that they are now working on raising over US$1 billion for a borrower in Thailand. Mr. Atkinson shared that they are working on US$900 million in local currency equivalent for a borrower in both Thailand and Bangladesh.
Therefore, Mr. Atkinson’s group tends to operate in the larger space where there’s complexity of geography, where there’s complexity of legal structure within the business or borrower itself, where the capital markets are moving and not easy to understand, and where there is time pressure and risk of loss to management and the borrower.
The nature of private credit
Mr. Atkinson’s presentation focused on private debt and private capital in general. He expounded that, at its most simple level, private debt and private equity have a number of similarities.
Here is the transcript of Mr. Atkinson’s presentation:
[Private debt and private equity] tend to be capital provisions from a tenure funding vehicle. They tend to be temporary capital provisions, so, part of a bridge in a business, which is commercially sustainable that’s often growing and changing. In Europe and North America, particularly, private equity and private debt tend to go into transactions together and come out together.
So, what’s the difference? And why is there a yield differential between equity and private debt? The reason for that is security. So, private credit is almost always secure in preference to equity, and that creates the difference. But it’s different from banks. So private credit is always funded. Banks are often unfunded capital providers. So, what that means is revolving credit or capital expenditure lines on Day 1 and not drawn.
Banks are often focused on the share that they can get from their participation or leading of a transaction, the share of the ancillary wallet that is available within the borrower. That might mean other things they can do for that borrower. Not necessarily M and A-driven, but though some houses are somehow focused on M and A. Not necessarily bond-driven, some houses are focused on bond emissions and things like that, for example, Deutsche Bank, but more in terms of, at a retail bank-level, what they can do for transactions, how they can get involved in Treasury, and how they can become a long-term partner for business.
And that time horizon is very different in banking than it is in private capital, whether it’s debt or equity providers, and it’s important to keep that in mind. So, banks, therefore, tend to look for lower yields and a share of ancillary wallet. Private credit is looking for a return on the transaction itself and looking for and very focused on the downside associated with the transaction. Whereas private equity will look at the upside that’s potentially there in the transaction, private credit is, therefore, a cash flow analytics business.
Regionally, in Asia-Pacific, private credit is emerging as an asset class. Now, I’m not going to throw stats at you because depending on which stat provider you look at, you get different numbers. But it is emerging in this region. Private credit and the private funds that are behind the provision of private credit, over the last five years, have emerged, and many of the really big names in the space. So, the Oaktrees, the Apollos, the Ares of this world, the bank capitals of this world, came to this region because of the growth it has, because of the power and emergence of China, and the opportunities it provides to generate a return on your capital provision. But that paradigm has changed.
So, private credit is emerging slowly here in Asia. The opportunities are broadly based. Originally, as I described, folks came for China growth. The region has developed economies — Australia, Korea, for example, as well as China, and also economies that are at the other end of the scale — so, the Sri Lanka of this world and economies somewhere in the middle, so, Philippines, Indonesia, India, where the opportunities are increasingly of interest to the private capital providers, particularly private debt providers.
More interesting now is China is slowing down; More interesting as some of the international private credit lenders remember their secured lenders have concerns over enforcement and security realization in a Chinese environment. And so, some of that capital, which was raised on the back of the China growth story, is looking for alternate homes. And those homes are interestingly Indonesia and Southeast Asia in general, India, but also Japan, which has been a low-growth, closed market to international private credit for the entirety of my career over 30 years.
In terms of sectors, the sectors that draw in private capital and private debt capital in this region are TMT, real estate, and energy transition. So, things with asset backing that is assets in scale, whereas in North America and Europe, it’s change and transformation companies, typically sponsor-backed transactions. While sponsor-backed deals are a large part of what private credit came to do, in fact, private credit is used in this region often where there are family offices involved, where there is a longstanding family involvement with the business, and not always the case where there is a majority control stake provided by private equity.
In terms of the market’s evolution where we are in Asia, and just things to think about as you’re going through your own process of looking at how you want to grow your career and how you want to progress, the market in private credit in the United States has been around for more than 30 years, and in Europe, for more than 20. It’s worth just pausing a little to understand why that might be.
So, the United States has one functional currency, being the US dollar, and if you’re lending in North America, it is almost pegged to the US dollar. Not quite, but it’s a very reliable exchange rate between those two currencies. Its 111 law governs the majority of the financing documents that are put out there and that tends to be New York law.
In Europe, the private credit provision market really was not scaled until the emergence of a functional currency that was the euro, and the emergence of two prevailing rules of law or codification environments for the legal documents that support private credit, either English law or codified European-style law, which tended to be French. Those two things are really important because they give private credit investors an understanding of the stability in macro, either in the form of the functional currency that is being used and in the form of enforcement; So legal security, the value of security, how to enforce, and how to use your leverage at the right time to ensure your returns are not unduly harmed in an underperformed credit.
So why has that market not emerged elsewhere? Well, in my region in Asia and Asia Pacific, some commentators would have you believe it’s due to China’s economic malaise. That is not for me, the reason because in the 30 or 40 years that the market has been active, present, and liquid in Europe and North America, there have been many economic cycles, ups and downs, and private credit has continued to thrive. What distinguishes this region is the lack of functional currency. The only functional currency for large borrowers in this region has been the US dollar, and there is no single jurisdictional primacy. So, documentation and the value of security are also difficult for private credit to assess.
Most of the big direct debt funds, whether they are regional or international that have come to this region, are investing US dollars, out of 10-year vehicles just like private equity. So, that is a strength because you can source dollar liquidity into your funds easily, and those US dollar funds in a very low-interest environment with stability in that macro are very successful.
But where the US dollar, until very recently, until this weekend when the Fed cuts rates, has been living in a 2.5-year cycle of rate hikes where the dollar, therefore, appreciates in relative terms to local currencies. Dollars become, if you’ve borrowed dollars and generate, for example, in Filipino peso, you could be a corporate that is growing both revenue and in peso terms. Let’s say, at 20 percent over a two-year period. But the peso-to-the-dollar has depreciated at around 40 percent of value prior to the rate hike cycle.
That means that, even though you’re growing, your leverage is increasing and your liquidity, therefore, is tightened. Therefore, there is a natural reticence among borrowers to take US-dollar-term credit. That’s a problem and it’s a problem that the funds and the region have to deal with because, as banks become increasingly regulated in Europe and North America and unable to deploy capital to sub-investment-grade investment opportunities through time because of the cost of doing that in terms of their own capital adequacy and capital buffers, there is a need for an alternate source of capital to fill that funding gap.
Now, the pressures haven’t been felt as keenly here in Asia-Pacific because in many of the markets — emerged or emerging — the banks have been largely insulated from the problems thrown out by the global financial crisis of 2008, and the capital buffers were pretty strong and some of the markets — Korea, Japan — have been so liquid that international capital has struggled either at an equity level or at a debt level to penetrate. That is changing, and the local banks’ liquidity surplus that was there and has been there for some time is becoming increasingly thin. And you can see that because the markets like Japan and Korea, but also like Philippines and Indonesia, are opening up to international debt capital, and that creates great opportunity as long as some of these macro issues, so the FX difference between the US dollar and local currency, the rule of law, can be overcome.
I think the providers of private credit — the really big beasts in the private credit jungle — so the likes of Apollo, the likes of Brookfield and Oaktree coming together, Brookfield being a primarily asset-backed style fund and Oaktree being a special set fund in their genesis — as these guys look to make their capital available for different yield points, so your Ares and Apollos of this world are buying insurance companies or other capital providers that allow them to compete with domestic banks. You will increasingly see private credit become a major part of this Asian market, though it will take, in my opinion, longer.
Do not forget that the difference between private credit and private debt is not necessarily timing. It is a yield and the yield differential is there because you have security, and that security is valuable. So, where you do not understand the enforcement of that security, the primacy of the reason for a differential between private equity and private credit is diluted.
There is work to do in my region on the quality of information that you provide to the private credit providers to allow them to make a rational investment decision. There is work to do around trust in the quality of that information and the reliability of that information; work to do around corruption concerns and all of those things as they become increasingly standardized and accepted, and the role of an advisor to reassure investors as well as the management teams that the capital structure that is being put in place is rational and can create value for all parties. As these things become more standardized, I fully expect private credit to be a super-exciting place for CFA charter holders or those going through that career to be active and involved.
*
After Mr. Atkinson’s presentation, he handed out PwC’s latest publication on private credit through a QR code, titled “Private Credit in Asia Pacific: Navigating the Region.” He remarked that he hopes the webinar participants will find the insight and linkage to PwC’s thought leadership around private credit in the Asia-Pacific region interesting.
*
Q&A Portion
Rahul Kedia 01:05 PM
Nick , can you please differentate and explain private credit and how it is different from private debt?
This question has been answered live
Anonymous Attendee 01:11 PM
Hi Nick, its nice to meet you. what are uses of funds for borrowers of private debt… project financing, ongoing working capital financing, financing corproate events — M&A, bridge financing etc
This question has been answered live
Anonymous Attendee 01:12 PM
Q2. Does PwC lends from its balance sheet… or provides a service to match private debt lenders and borrowers?
Anonymous Attendee 01:13 PM
Could you please commment on the possibility of a private credit bubble, and what should investors be watching out for?
MURLI DINESH DADLANI 01:14 PM
Hi Nick, How does the lack of a secondary market and limited price discovery in private credit loans contribute to their illiquidity, and what risks do investors face if they need to exit before maturity?
XIAOSU ZENG 01:18 PM
How do private credit investors manage FX risk when the funding currency differs from the local currency in Asia? How does that impact the return expectations for investors?
Vipin Gupta 01:18 PM
is private credit standardized and securitized? how is credit risk exposure managed (by credit providers). Is it common to use hedging securities like CDS etc
Anonymous Attendee 01:20 PM
Hi Nick, thank you so much. Two questions from my side: 1) Give us an estimation between the yield differential between private equity and private debt — how many bps? (2) Why would someone raise more expensive capital through private credit rather than a staright bank loan? Thank you.
Related News
Apollo, Ares and Oaktree to Launch $90 Million Initiative for Students at Historically Black Colleges and Universities
By Apollo Global Management, June 15, 2021
Leading firms invest in Black Futures with formation of “AltFinance”
Initiative to introduce more HBCU students to the influential alternative investment industry
NEW YORK — (BUSINESS WIRE) — Apollo Global Management, Inc. (Apollo), Ares Management Corporation (Ares) and Oaktree Capital Management, L.P. (Oaktree) today announced a 10-year, $90 million, industry-first initiative, “AltFinance: Investing in Black Futures™.” The initiative is designed to diversify the alternative investment industry by attracting, training and providing career opportunities for college students attending three Historically Black Colleges and Universities (HBCUs).
AltFinance will be launched in partnership with Clark Atlanta University, Morehouse College and Spelman College, and is intended to provide students with clear pathways to careers in the alternative investment industry. The initiative has three primary components: a mentored fellowship program, a tailored virtual institute and a scholarship program. Fellowships will provide select students at the partner HBCUs the opportunity to work directly with a mentor and learn the ins and outs of finance and alternatives. The fellowship program will be run in partnership with Management Leadership for Tomorrow (MLT), a national nonprofit organization working to ensure that Black, Hispanic/Latino and Native American people reach and thrive at the highest levels of corporate America. AltFinance fellows will also have access to needs-based scholarship funding. The goal is to ensure money isn’t a barrier to exploring and preparing for a career in alternative investments.
The Wharton School of the University of Pennsylvania, the nation’s oldest collegiate school of business, has signed on to create a best-in-class virtual institute to offer educational materials and tools necessary to excel in the alternative investment industry. The virtual institute will be open to interested students at all HBCUs, and will provide participants with relevant coursework and other supplementary content developed by top professors and finance professionals.
The AltFinance initiative will be administered by ALT Finance Corporation, a non-profit organization established by the three founding firms. Apollo, Ares and Oaktree will each contribute $3 million per year for 10 years, marking the first major multi-firm commitment to increase opportunities in the alternatives industry.
Apollo Chief Executive Officer Marc Rowan said, “HBCUs have an incredible history of opening doors, and we are thrilled to partner with these institutions and our colleague firms to expand opportunities in alternative investing. At Apollo, we recognize that we have been the beneficiaries of opportunity, and that it’s incumbent upon us to create opportunity for a broader group of talent. Together with our partner firms, we conceived AltFinance as a high-touch, comprehensive program to not only introduce talented Black students to the industry, but also to provide training, support, mentorship and a clear pathway to careers in alternative investing. Through initiatives like AltFinance, we will continue to work to break down barriers and seed, catalyze and advance opportunities for great talent from diverse backgrounds.”
Ares Management Chief Executive Officer and President Michael Arougheti said, “Ares is firmly committed to being an agent for positive change across our company and industry, and we believe we have the resources and passion to make a sustainable impact in the lives of others. Through our partners within AltFinance, and our groundbreaking partnership with three leading HBCUs, MLT and Wharton, we are accelerating our efforts to foster diversity both within our respective organizations and the alternative investment industry more broadly. Our objective is to provide these students with the knowledge, resources and employment opportunities needed to succeed and thrive as professionals. We are excited to be taking this momentous stride forward and hope we have inspired others in our industry to join us in our efforts in the future.”
Oaktree Co-Chairman Howard Marks said, “Success in our industry requires creative, often contrarian thinking and the avoidance of groupthink. This can be tough to achieve if the workforce — and particularly those in senior roles — mostly reflect a common background. Working with HBCUs will allow alternative investment managers to tap into a deep talent pool that this industry has often overlooked. Black scholars have always possessed the ambition and skill needed to succeed in alternative investing; only broad access to opportunities has been missing.”
AltFinance recognizes the need to create greater access for promising HBCU students for careers in alternative investing, including opportunities with the three firms as well as within the broader financial services industry. “The alternatives investment industry is one of the most influential industries in the world. It’s a field for smart, creative and passionate people who can develop and execute ideas that break the mold. HBCU students should be prominent among the next generation of leaders for the industry,” said John Rice, founder and CEO, MLT. “AltFinance will be transformational for its future participants. They will have the chance to learn about investing and apply those skills to accelerate their trajectory as well as have a positive impact on our communities. It will be a game-changer for every one of them.”
“We are proud to play an important role in the creation of AltFinance which, through its efforts to support HBCUs, will make an immediate and positive difference for students of color,” said Erika James, dean of The Wharton School. “As the country’s largest business school, with a reach from pre-college students to C-suite executives, it is Wharton’s privilege to offer our world-class faculty and resources to those who are so deserving.”
AltFinance is expected to launch by the first half of 2022 and may expand beyond the three initial partner HBCUs in years to come.
Kirkland & Ellis LLP provided pro bono legal representation to ALT Finance Corporation in connection with its formation and the establishment of the AltFinance initiative.
For additional information on AltFinance, please visit altfinance.com.
AltFinance
AltFinance: Investing in Black Futures is a 10-year, $90 million initiative established by Apollo Global Management, Inc., Ares Management Corporation and Oaktree Capital Management, L.P. to help diversify the financial services industry. The AltFinance initiative will be administered by ALT Finance Corporation, a non-profit organization established by the three founding firms. The initiative is intended to provide clear pathways for students at partnering Historically Black Colleges and Universities (HBCUs) into careers in the alternative investment industry. The program provides access to education, training, mentorship, scholarship funding, internships and full-time career opportunities. The fellowship program will be managed in partnership with Management Leadership for Tomorrow (MLT). The Wharton School of the University of Pennsylvania will create a virtual institute.
Apollo Global Management
Apollo (NYSE: APO) is a high-growth, global alternative asset manager. We seek to provide our clients excess return at every point along the risk-reward spectrum from investment grade to private equity with a focus on three business strategies; yield, hybrid and opportunistic. Through our investment activity across our fully integrated platform, we serve the retirement income and financial return needs of our clients, and we offer innovative capital solutions to businesses. Our patient, creative, knowledgeable approach to investing aligns our clients, businesses we invest in, our employees and the communities we impact, to expand opportunity and achieve positive outcomes. As of March 31, 2021, Apollo had approximately $461 billion of assets under management. To learn more, please visit www.apollo.com.
Ares Management Corporation
Ares Management Corporation (NYSE: ARES) is a leading global alternative investment manager offering clients complementary primary and secondary investment solutions across the credit, private equity, real estate and infrastructure asset classes. We seek to provide flexible capital to support businesses and create value for our stakeholders and within our communities. By collaborating across our investment groups, we aim to generate consistent and attractive investment returns throughout market cycles. As of March 31, 2021, including the acquisition of Landmark Partners, which closed June 2, 2021, Ares Management’s global platform had approximately $227 billion of assets under management with more than 1,600 employees operating across North America, Europe, Asia Pacific and the Middle East. For more information, please visit www.aresmgmt.com. Follow Ares on Twitter @Ares_Management.
Oaktree Capital Management
Oaktree is a leader among global investment managers specializing in alternative investments, with $153 billion in assets under management as of March 31, 2021. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in credit, private equity, real assets and listed equities. The firm has over 1,000 employees and offices in 19 cities worldwide. For additional information, please visit Oaktree’s website at http://www.oaktreecapital.com/.
View source version on businesswire.com: https://www.businesswire.com/news/home/20210615005477/en/
Media Contacts:
AltFinance:
Tracey Bowen
PRecise Communications
tracey@precisecomm.net
404–983–3727
Apollo Global Management:
Joanna Rose, Global Head of Corporate Communications
(212) 822–0491
communications@apollo.com
Ares Management Corporation
Brunswick Group
Jonathan Doorley / Alex Yankus, 212–333–3810
ARES@brunswickgroup.com
or
Ares Management
Priscila Roney, 212–808–1185
proney@aresmgmt.com
Oaktree Capital Management:
Alyssa Lorenzo / Monique Sidhom
Sard Verbinnen & Co
mediainquiries@oaktreecapital.com
Source: Oaktree Capital Management, L.P.
References:
https://www.arx.cfa/research/2024/10/soc071024-webinar-private-markets-webinar-series-private-credit
https://www.brookfieldoaktree.com/glossary/private-credit
https://hk.linkedin.com/in/nick-atkinson-61119413
https://www.pwchk.com/en/asset-management/navigating-the-region-apr2024.pdf
