Investment Grade Debt Becomes the Next Major Focus for Private Credit

Stay updated on the latest news in Capital markets by subscribing to our free newsletter.

Receive a daily email roundup, called myFT Daily Digest, with the most recent Capital markets news every morning.

Alternative asset managers like Apollo, KKR, and Blackstone are diversifying their funding options by providing capital to well-established companies. This strategy helps these companies counteract the effects of rising interest rates and a sluggish economy.

The recent deals, including partnerships with AT&T and PayPal, highlight the expanding role of the private credit industry. Instead of relying on traditional banks and bond markets, companies are turning to private credit for their fundraising needs.

Private credit has experienced tremendous growth over the past decade, amassing $1.4tn in assets. Initially, private credit primarily served smaller or riskier companies. However, alternative asset managers are now targeting larger and more stable companies, leading to increased investment-grade private credit opportunities.

The fundraising success of private credit firms has enabled them to provide ample capital for lending. Additionally, several major private equity groups have invested in insurance companies, attracting substantial premiums to further boost lending capacity.

Apollo has been particularly influential, with its insurer Athene amassing around $260bn in capital. It has allowed Apollo to focus on investment-grade private credit and benefit from the shift away from traditional banking.

Other major players in the alternative asset management industry, such as KKR and Carlyle, have also seized opportunities by investing in insurance companies and reinsurers. Blackstone, on the other hand, caters to insurers through its insurance solutions division.

State regulations require insurance units to invest the majority of their holdings in investment-grade rated debt. However, alternative investment managers have leveraged financial innovations to structure more attractive private transactions that offer higher returns compared to traditional investment-grade bonds. This appeals to companies seeking to raise cash without impacting their credit rating by issuing more corporate debt.

These deals have taken various forms, often involving the transfer of assets to subsidiaries or special purpose vehicles. Companies then raise preferred equity or debt against these entities, providing immediate cash for their core operations. Preferred stock deals are favorably regarded by rating agencies, and the use of special purpose vehicles avoids reporting these investments on the parent company’s balance sheet.

Apollo’s investment in AT&T preferred stock and German real estate group Vonovia exemplify the success of private financing strategies. Additionally, famous companies like AB InBev, Hertz, and the Abu Dhabi National Oil Company have also benefited from Apollo’s private investment offerings.

KKR’s recent agreement to purchase up to €40bn of consumer loans originated by PayPal showcases another type of private financing resembling traditional asset-backed securities. In this arrangement, a pool of assets, such as mortgages, credit card receivables, or auto loans, is packaged together. The interest payments generated from these assets fund new debt slices sold to investors.

The partnership between blue-chip companies and alternative asset managers, utilizing insurance capital and private credit, is a prevailing trend. For instance, Intel joined forces with Brookfield and its infrastructure funds for a $30bn deal. This investment allows Intel to tap into new capital sources while safeguarding its balance sheet for future investments.