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Among the big Wall Street firms that deploy private capital, there has been a marked shift in recent years: their sometimes swashbuckling buyout operations no longer command sole attention.
Over the past decade, these firms have moved increasingly into credit investing, a steadier and more expansive endeavour than traditional private equity. With lending opportunities expected to grow after the ongoing stress among US regional banks, that shift has now positioned the firms in a propitious place.
Blackstone chief operating officer Jonathan Gray recently said it was a “golden moment” for so-called “private credit”, lending that is funded by institutions that do not take customer deposits. In contrast, the Apollo co-founder Marc Rowan recently told an audience that, “private equity is mature . . . I’m sure there’s always room for improvement, but the private equity business is a 35-year-old business”.
The offices of the big industry players on 57th Street or Park Avenue in Manhattan were once largely home to financiers who combined exotic deal structuring with operating expertise to refashion whole industries. In leveraged buyouts, acquisitions could often return double or triple the equity investment in a few years.
Fortunes were minted as conventional private equity collected fees of 2 per cent of assets under management, plus 20 per cent of the profits above set levels. And the firms did not require excessive employees. “How many people do I want making $750mn levered equity investments? Not that many,” Apollo’s Rowan said earlier this year.
Now, however, these Masters of the Universe are joined in the lunchroom and washroom with legions of glorified loan officers happy to clip an 8 per cent interest coupon and call it a day. “Credit always gets treated like second-class citizens,” said an executive at a large legacy private equity firm. “Until they finally hit some kind of scale.”
Howard Marks, industry veteran and founder of the Oaktree Capital Management, has warned the boom in private credit will soon be tested as higher interest rates and slower economic growth heap pressure on corporate America. But credit has not only achieved scale in the private capital firms but the old school private equity crew have made sure to get their cut of the bounty. And that has made it more than worth while to cede the spotlight.
At the big four diversified private capital managers — Apollo, Blackstone, Carlyle and KKR — private equity accounts for just 30 per cent, on average, of their assets managed. The rest is not just in lending but also in real estate, infrastructure, hedge funds and in specialised areas such as investing in the energy transition.
Those proportions also reflect extraordinary changes in the employee base of the firms. Apollo and KKR now each have more than 4,000 employees, around triple their levels five years ago after both acquired large life insurance companies, according to securities filings.
The traditional private equity LBO groups have been highly insular, overwhelmingly composed of white men with Ivy League degrees. The newer areas tend to be less homogenous with greater representation of women and other groups who have been less visible in high finance.
Credit is not just an attractive growth market. The stability of the $50tn fixed income market in the US alone leads to predictable management fees, albeit with less upside potential. These big fund managers are now publicly traded and have discovered that mutual funds prize management fees with higher valuation multiples.
As such, firms have gone so far as to engineer their corporate structures to ensure that more management fees flow to their public-traded stock vehicles. At the same time, the erratic but large performance fees, known as carried interest, are being retained by insiders rather their public shareholders.
The stock market valuations of these firms are increasingly driven by the credit strategies and the like. Blackstone’s near $1tn assets under management allowed its founder, Steve Schwarzman, to take home more than $1bn altogether in 2022 in his share of profits from investment funds — or carried interest — along with dividends on his shareholding in the firm.
In late 2021, Apollo said in a filing that one of its carried interest programmes “was not achieving its human capital goals” and it would instead swap that plan out for stock-based pay to promote “further alignment across the platform”. For private equity group members, some of their pay then was suddenly disproportionately tied to the growth in credit assets, the most crucial driver of the stock price.
“There is definitely a view among the traditional alternative investing firms that performing credit is a less complicated . . . form of investing,” said one executive at a large asset manager, alluding to the snobbery of buyout pros. “And, interestingly, that is what makes credit so scalable versus traditional private equity.”
sujeet.indap@ft.com
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