Private credit: locked-in capital locks out market panic

Blackstone knew what it was doing. In recent months, the private assets giant limited redemptions from Breit, its real estate investment fund. Like many such vehicles for rich private investors, the $975bn fund has inbuilt “gates”. These forestall panic selling of assets at bargain prices when investors want their cash back.

The banking sector, in contrast, cannot cope without daily liquidity. This has become clear recently following the collapse of Silicon Valley Bank brought on by an old-fashioned bank run. SVB’s assets, tied up in securities and loans, were much harder to liquidate than its evaporating deposits.

That reprises an eternal question: how can banks ever be safe when they have short-term liabilities and long-dated assets? The twist this time is introduced by fast-growing private capital funds.

It is no coincidence that alternative asset groups such as Apollo and Blackstone are among the chief pursuers of SVB loan books. They have built and acquired huge credit origination contraptions that manage hundreds of billions of dollars each. Corporate lending is increasingly a function for this breed of asset manager.

Even with massive growth, these groups are still dwarfed by the banks. The capital bases that asset managers derive from pension limited partners or, increasingly, retirement annuity holders, are, by definition, more expensive than interest-free bank deposits.

But this capital has the benefit of being more dependable and less prone to stress in times of instability. That helps the likes of Blackstone and Apollo to opportunistically deploy capital when market valuations sink. Expect those who pick up SVB assets in the current auction to do well from them over the next few years.

Restrain your enthusiasm for a moment: the scaled-up credit fund industry has yet to weather a full market cycle. Cracks may yet appear.

But at the least, you could give two cheers for the contribution the industry has made to reducing the scope for capital flight during market panics.

This post was originally published on Financial Times

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