1/29/2024

Morgan Stanley doubles down on private loans

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Key points:

  • Morgan Stanley plans to double its private credit portfolio to $50 billion over the medium term.
  • Demand for private lending has increased in recent years as stricter regulations have made it more expensive for banks to finance risky loans.
  • As market participants anticipate lower interest rates, traditional banks are becoming more competitive in credit markets compared to direct lenders.

Morgan Stanley is planning to expand its private credit portfolio to $50 billion in the mid-term. The bank collects funds from large investors to issue loans to companies.

The bank has invested more than $300 million in the business, which has already raised about $25 billion in total assets from institutional investors, said David Miller, global head of private credit and capital at Morgan Stanley.

Institutional investors such as sovereign wealth funds and insurance companies hold two-thirds of the current portfolio, with wealthy individuals holding the rest, he said. Miller estimates the broader private lending market has grown to $2 trillion.

 

Demand for private lending has increased in recent years

The growth of private credit, with direct lending as a key component, has surged following the financial crisis, as stricter regulations have made it more costly for banks to fund risky loans to companies burdened with debt.

Over the past two years, activity in this sector has expanded significantly. As banks’ capital has been tied up in risky loans and interest rates have risen, bank syndicates have been able to offer less financing through traditional syndicated loans.

However, Wall Street banks have discovered methods to participate in this new market by raising funds for loans from investors rather than utilizing their own balance sheets.

As market participants increasingly anticipate the Federal Reserve to decrease interest rates, traditional banks are beginning to gain a competitive advantage in credit markets compared to direct lenders, according to Jeff Levin, co-head of private lending for North America and head of direct lending at Morgan Stanley.

 

Other banks are also making plans for private lending

Goldman Sachs CEO David Solomon stated earlier this month that the bank intends to raise $40 billion to $50 billion from alternative funds this year. The majority of this amount is allocated for private loans.

JPMorgan Chase has dedicated $10 billion of its own capital to private lending. The bank is also seeking capital from third-party investors who want to partner with the bank in this sector.

Wells Fargo has teamed up with private equity firm Centerbridge Partners to establish a business focused on direct lending to mid-market, family-owned, and privately held businesses in North America.

This move is based on the assumption that lower interest rates will allow banks to charge companies less interest on risky loans than private lenders, who typically charge more. Additionally, lower borrowing costs are expected to boost overall economic activity and dealmaking, which could further boost bank activity.

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