Panel, Conference Presentation
Banks Stepping Out, Private Credit Stepping In | Milken Institute Global Conference 2024
Milken InstituteJohn Bowman, Jeffrey Aronson, Marianna Fassinotti, Gregory Geiling, Peter Gleysteen, Drew McKnight
- The private credit asset class is projected to continue expanding as intensifying bank regulations drive a shift from "storage" to "moving" business models, with banks expected to remain under high regulatory pressure and liquidity constraints for at least the next three to five years.
- Implementation of the Basel Endgame Plan is anticipated in the third quarter, with a compliance deadline of June 2028, likely necessitating a 15 to 20 percent increase in bank equity capital and triggering a new wave of balance sheet optimization similar to the 2011 Basel III proposal.
- A "huge growth area" is forecast for U.S. middle-market businesses currently outside the direct lending sphere, alongside expectations for banks to partner with private credit funds in trends involving hundreds of billions of dollars.
- Dispositions of portfolio companies are expected to resume soon, with the specific timing framed as a matter of "when" rather than "if," while a secondary market for private credit is predicted to emerge soon where transactions will trade at portfolio levels with potentially modest discounts.
- Future market performance will likely be characterized by rolling recessions in specific sectors like big box and big office real estate, though a downturn of the magnitude of the Global Financial Crisis is not expected to recur.
- Manager differentiation will become critical during negative economic cycles, as the market has not been fully tested outside of the 12 weeks in 2020 over the last 15 years, with infrastructure capabilities for portfolio workouts serving as a key differentiator.
- Direct lenders are expected to systematically penetrate the middle-market, while the probability of traditional banks aggressively reclaiming direct lending share in the near future is considered low even if regulations shift.
- Risks regarding systemic stability are viewed as mitigated, with current risk transfer structures moving leverage into closed-end funds where it remains modest, though the path of growth is not expected to be smooth sailing forever.