Michael Arogeti, co-founder, CEO and president of Ares Management Corporation
Adam Jeffrey | CNBC
The explosion in private lending has been met with a number of concerns, but among the most high-profile recently has been the failure of the industry to experience a widespread downturn. So what does this mean for borrowers when some kind of crisis occurs?
When Jamie Dimon was asked about the migration of assets into the non-bank sector at JPMorgan Investor Day earlier this week, he said: “We will compete. We’ll be fine.” But he added that “the question they should be asking is what does this mean for the United States of America?”
“Many of those who have taken out private loans will find themselves in difficulty when [obscenity] “Banks typically deal with middle market borrowers and loans during times of crisis…in the world of overpriced private credit, they have to, as a fiduciary, book it at par.” ”
In other words, he said, “private credit didn’t deal with high interest rates, didn’t deal with recessions, and didn’t deal with high spreads.”
We don’t know how these trainings will… work.
The next day, the CEO of one of the largest private credit companies defended the industry and how it would handle times of stress. When asked on CNBC about Dimon’s recent comments, Ares Management CEO Michael Arogethi responded: “Not true.”
“We’ve been investing in private markets for 30 years. A loan is a loan, whether it is held on the balance sheet of a bank or in a private credit fund,” Arugheti said. “[Ares has] Since its inception, the firms have invested $150 billion in the private lending market and have suffered a loss rate of one basis point. So everything we’ve seen over the last 30 years indicates that the risk that people are trying to claim exists in our market is simply not true.”
Ares Management (ARES), 1 year
Ares Executive Chairman Tony Ressler, sitting next to Arugeti in an interview with CNBC, said the rise in private lending would “actually reduce systemic risk.”
“These assets end up on the balance sheets of companies that are not highly leveraged and do not finance themselves through short-term liabilities or customer deposits,” Ressler said.
Private Loan Default Rates
In January Federal Reserve looked at default rates on private loans and how they compare to loans made by traditional banks (leveraged loans and high-yield bonds). Citing KBRA DLD data, the Fed showed that “despite seniority in debt structure, private loans have relatively low rates of repayment if default (or, equivalently, exhibit high losses if default) compared to syndicated loans or HY -bonds.”
On Thursday, we received updated data from KBRA DLD that showed a more mixed picture when it comes to estimated refunds. The average direct loan cost after default was about 53.1 percent, lower than syndicated loans, which was 57.5 percent, but higher than high-yield bonds, which was 46.3 percent.
The Fed attributes this gap in part to the fact that private credit risk is more focused on sectors with fewer collateral or tangible assets, such as software, financial services or health care services.
But the faster private credit grows, the more interconnected it becomes with the traditional banking space. J.P. Morgan Investor Day executives said the firm is the largest financier of private loan portfolios and already has committed capital on its balance sheet that it uses in its direct lending format to corporate borrowers. The firm is also developing a co-lending program to increase the amount of capital it can deploy in this area.
So if a possible downturn does show up in the economy, it’s likely that you know what will hit everyone. Some borrowers will feel the hit more than others.