Private Credit and Traditional Banks Forge a New Path

As direct lending becomes a more popular financing option for middle-market and large U.S. companies, banks are increasingly seeking new ways to leverage their existing customer networks to participate in the direct lending market. However, because traditional banks have been largely circumscribed by regulators in their ability to participate directly in the leveraged loan market, they have been seeking innovative ways to effectively access this market. One increasingly popular idea is for banks and private credit investors to partner to create a direct lending fund or a platform or other partnership, seeded by financing from both the bank and private credit investors. This approach provides benefits for both parties—banks are able to use their large relationship networks to source new customers for direct lenders, keep loans that do not pass leveraged lending guidelines off their balance sheet, and help customers access another source of funding, while direct lenders gain access to a new client pool for which to deploy their considerable capital.

Recently Centerbridge Partners and Wells Fargo entered into a strategic relationship focused on direct lending to non-sponsor North American middle market companies, Société Générale and Brookfield Asset Management have partnered to create a private investment grade debt fund targeting a total of EUR 10 billion, and AGL Credit Management entered into an exclusive cooperation agreement with Barclays on the launch of a new private credit investment platform, AGL Private Credit. Through these partnerships and new platforms, banks are able to access the direct lending market through a variety of different structures, including business development companies (BDCs) and other fund vehicles, instead of on-balance sheet lending. 

As banks consider opportunities to play a bigger role in the growing private credit industry, determining the right structure, as well as thinking through regulatory and governance considerations, are vital. Interested parties should consider which structure best fits their goals, including whether a BDC or registered fund may offer regulatory and tax advantages over other vehicles and structures. Parties should determine their ideal capital structure and leverage, including the ideal amount of leverage for the platform and what type of financing will be offered, as well as considering important regulatory and tax issues, including bank regulatory issues, 1933 and 1934 Act issues, distribution issues, and seeding and stakes in connection with anchor investors. Ultimately, partnerships between banks and private credit firms canhelp both parties – as well as borrowers – by giving the private credit firms access to more companies and potential deals while allowing banks to offer their clients access to a new type of financing that wasn’t previously available.