Conference Presentation, Panel
New Horizons: The Evolution of Direct Lending and Illiquid Credit
Milken InstituteStaci Warden, Michael Arougheti, Mary Katherine DuBose, Damien Dwin, Nino Fanlo, Terry Harris, Mike Garaghetti, Mary Catherine Dubois
- The direct lending market is projected to expand boundaries through increased capital flows and emerging products, with long-term forces driving a shift toward scale, global providers, and competitive efficiencies while maintaining performance.
- Barings expects private credit to diversify from traditional corporate private placements into infrastructure, serving as a complement to liquid fixed income, and anticipates European base rate floors potentially exceeding sterling LIBOR and EURIBOR, resulting in all-in spreads of 150 basis points or more.
- SoFi forecasts revenue growth of approximately 100% and EBITDA growth of approximately 300% while adding 20,000 customers monthly, aiming to replicate Amazon-like industry dominance in direct lending to access super prime credit assets previously unavailable outside bank platforms.
- Loan demand is expected to remain very strong across all asset classes for the foreseeable future, with demand exceeding supply, while market mechanisms are anticipated to evolve to allocate capital more efficiently between liquid and illiquid assets.
- The cost of regulatory compliance for banks is currently estimated between 400 and 500 basis points of ROE, though simplified regulations combined with rising interest rates could potentially increase the ROE opportunity within banks by 40% to 50%.
- Wells Fargo anticipates its expanded asset-backed finance business covering real assets and infrastructure has significant balance sheet growth potential due to an attractive risk-based capital profile, operating within a symbiotic relationship with banks characterized by leverage ratios of two-to-one or one-to-one.
- Private debt markets are predicted to remain on solid footing despite regulatory pressures, with supervision focusing on the liability side of the balance sheet for asset managers and evolving rules regarding how non-bank entities raise capital following two decades of expansion.
- The direct lending market is currently considered "priced to perfection" regarding execution and operational risk, leaving little margin for error in underwriting, and the social or relationship premium currently charged may decrease as mechanisms evolve.
- Asset management businesses face a outlook of declining unit economics and revenue with sales practices under increased government scrutiny, while SoFi intends to leverage direct lending to significantly win in the market through improved products and services.