Private credit and non-bank lending have been increasing for years now. A recent report indicates that “dry powder” has reached $159.38 billion in the US – the largest amount ever.
Historically, it has been the banks that provided loans for businesses and consumers. Still, the rise of improved technology and the hunt for better yields has given rise to private credit funds where investors can participate in the asset class – thus cutting out banks.
According to S&P Global Intelligence, private credit funds have been on the rise since 2010, when it was a small fraction of just $7.87 billion compared to today’s amount. The report claims that bank executives acknowledge that some clients are turning to private credit, but but they also note this could provide opportunities for traditional depositories.
Quoting Atlantic Union Bankshares Corp CEO John Asbury, who says private equity firms typically raise the funds that often support private equity-backed firms, describing the ecosystem as “a healthy dynamic to help customers grow and take out some of the riskier loans off our portfolio.”
Other banks worry that as banks tighten lending largely due to regulatory costs, non-bank lenders are stepping in and capturing the demand. Losing a customer to a non-bank lender can have an extended impact on the relationship with these firms as they may not return to the bank.
The total market for private credit is estimated at over $1.25 trillion and growing. Still, the market is far smaller than bank lending ($11.04 trillion) and bonds ($9.08 trillion).
As technology improves, private credit markets could be opened up to more diverse investors, which may undermine the banking sector’s favorite revenue generator. But do not count banks out yet as they still dominate, and they continue to adapt. Combine this with a more bank-friendly administration, and banks may be able to hold or capture more market share.