The asset management arm of Morgan Stanley MS wants to double its private loan portfolio to $50 billion in the medium term by raising funds from large investors and lending them to companies.
The bank has invested more than $300 million in the business, which has already raised about $25 billion in total assets from mostly institutional investors, David Miller, Morgan Stanley’s global head of private credit and equity, said in an interview with Reuters.
“The majority of new capital will continue to come from our institutional customers over the next ten years,” said Miller. Institutional investors such as sovereign wealth funds and insurance companies hold two-thirds of the current portfolio, with wealthy individuals accounting for the rest.
Miller estimates the broader personal loan market has grown to as much as $2 trillion.
Personal lending, which includes direct lending, has increased since the financial crisis as tighter regulations made it more expensive for banks to finance risky loans for indebted companies.
Activity has increased significantly in the last two years. As banks’ capital was tied up in risky loans and interest rates rose, banking groups were able to provide less financing through traditional syndicated loans. Private lenders such as Ares Management, KKR and Blackstone have entered the scene.
Still, Wall Street banks have found ways to participate in the new market by raising money to borrow from investors rather than using their own balance sheets.
Goldman Sachs Chief Executive David Solomon told analysts this month that the bank plans to raise $40 billion to $50 billion in alternative funds this year. Much of that will be for personal loans, according to a source familiar with the matter.
JPMorgan JPM has earmarked (link) $10 billion of its own capital for private lending, according to sources familiar with the matter. JPMorgan is also seeking capital from outside investors interested in supporting the bank in this segment, one of the sources said.
JPMorgan declined to comment on its plans.
Wells Fargo has partnered (link) with private equity firm Centerbridge Partners to build a business focused on direct lending to middle-market, family-owned and private companies in North America.
As market participants increasingly expect the Federal Reserve to cut interest rates, traditional banks are starting to become more competitive in credit markets than direct lenders, said Jeff Levin, co-head of North America private credit and head of direct lending at Morgan Stanley.
Lower interest rates will allow banks to charge businesses less interest on risky loans than private borrowers, who typically charge more. And cheaper borrowing costs will likely boost economic activity and business deals generally, another factor that could stimulate bank activity.
“As activity in the syndicated markets increases and banks become more aggressive, the share of retail loans among large deals may decline, but we will continue to see growth,” Levin said.
The Private Credit Group, part of Morgan Stanley’s wealth management division, consists of around 60 bankers who work with investment bankers to originate loans.
Levin, who oversees a $16 billion private loan portfolio, said the loans will be made to companies ranging from middle class to large corporations.
2024-01-26 17:55:02
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