Private credit firms want more than corporate lending. The largest are laying the groundwork to finance everything from auto loans and residential mortgages to chip manufacturing and data centers in an effort to swell the size of the market by the trillions.
It’s part of a race to grab a bigger share of a universe of potential investments that Apollo Global Management has said could be as large as $40 trillion. The staggering estimate is tied to a boom in private investment-grade debt related to infrastructure and asset-backed finance. Those areas will be top priority for firms next year, according to managers interviewed by Bloomberg News.
“There is a shift in the world’s understanding that there’s a lot more beyond direct lending,” said Michael Zawadzki, the global chief investment officer at Blackstone’s credit and insurance unit. “This ecosystem of private investment-grade is a massive market with a huge tailwind.”
Data provider Preqin currently pegs the size of private debt assets under management at around $1.6 trillion, a number focused on corporate debt strategies. Hitting the industry’s expansion goals would require a strong consumer and the materialization of lofty projections surrounding artificial intelligence. And with so many firms focused on the same areas, too much competition could also hurt plans.
While next year will show whether a push into asset-backed finance and infrastructure debt is accelerating, the industry will have to prove in the coming years how large the appetite is for this product shift.
Though high yield-focused corporate direct lending has attracted most of the market’s attention and capital in recent years, its growth is slowing, leaving firms needing to permeate new areas to expand.
“The asset-backed business is probably sitting where the direct lending market was sitting five to seven years ago,” said Dan Pietrzak, the global head of private credit at KKR & Co., which estimates the total addressable market for credit at around $40 trillion, across public and private. For context, the S&P 500’s entire market capitalization is about $50 trillion.
Private debt has increasing opportunities to take market share in these spaces as banks continue on a quest to become more asset-light as a result of stricter post-Global Financial Crisis regulations. A second Trump administration might soften some requirements but isn’t expected to change this long-term shift.
“The fundamental model of a bank is changing from lending to earn a return to lending to make fees and attract deposits, and I don’t think that paradigm shift is changing anytime soon,” said Loris Nazarian, an assistant portfolio manager at Oaktree Capital Management’s private assets business.
Investors, or limited partners, are also driving the push, as part of an effort to diversify into and within the private markets. Investment-grade debt is also in high demand from insurance companies looking for safe, but lucrative, places to park vast amounts of capital. Private credit firms are also racing to scale up and become one-stop shops for all types of investing for their LPs.
Asset-backed finance refers to packaging together pools of loans or assets that generate cash, and then lending against the recurring cash flow of that portfolio. The scope is broad: everything from auto loans or mortgages to music royalties or trade receivables. Small business loans and income streams from mobile phone towers or data centers can count, too.
Traditionally, regional banks have been big buyers of these types of loans, sometimes providing financing against the pools or by repackaging them into securities of varying risk and size. That changed in 2023 as banks and credit unions retreated from the market following the demise of Silicon Valley Bank. Although some are back to financing this space, that gave an opening to private credit lenders.
Banks also historically made many of these types of consumer and commercial loans, especially mortgages. But as regulators pushed banks to de-risk, many offloaded existing loans and pulled back from new ones.
KKR estimates that about $500 billion of additional assets will leave banks and move to private funds. The firm expects the private asset-backed finance market to grow to $9.2 trillion by 2029, up from about $6.1 trillion currently.
“Demand from banks for that capital continues to evolve and their box continues to get more narrow,” said Greg Leveto, a portfolio manager and partner at Oak Hill Advisors. “For things that fit in the box, their appetite is still substantial, but the box is historically small and shrinking.”
ABF allows private credit investors — insurers, pensions and others — to provide investment-grade equivalent loans but see more yield, given the direct origination and illiquidity of deals. This “hunt for yield” is expected to continue and investors can “get paid above a regular-way investment-grade bond,” said KKR’s Pietrzak.
Some firms including Apollo, KKR and Blackstone already have scaled private ABF businesses they plan to expand, while others are now ramping up.
Sixth Street Partners expects to grow its ABF assets under management over the next five years to make up a significant portion of its investments, said Co-Chief Investment Officer Joshua Easterly. The firm is currently focused on consumer products like mortgages and car loans and looking to expand in commercial lending.
