In an effort to counteract the growing influence of private lenders in the leveraged buyout financing sector, major banks like Citigroup Inc. (C, Financial) and Goldman Sachs Group Inc. (GS, Financial) have initiated a new approach. By leveraging their extensive networks, these financial giants are now playing the role of intermediaries, connecting smaller entities in need of loans with private financiers willing to offer the necessary capital, all for a service fee.
This move represents a strategic pivot for traditional banks aiming to recapture a portion of the leveraged lending market they've seen diminish over time. Historically, large-scale buyouts were predominantly financed through junk bonds and leveraged loans syndicated by these major banks, a process that once constituted a significant share of their investment banking revenue.
With the ascendancy of private lenders capturing more of this market, banks have been compelled to explore alternative avenues for involvement. Institutions such as Wells Fargo & Co. (WFC, Financial) and Barclays Plc (BARC, Financial) have formed strategic alliances with private credit firms, while JPMorgan Chase & Co. (JPM, Financial) has actively sought partnerships to bolster its presence in the private credit domain.
According to John McAuley, Citigroup's head of debt capital markets, the bank's extensive origination capabilities allow it to pivot effectively when traditional syndicated markets do not meet the specific needs of borrowers.
As the buyout market decelerates, direct lenders are eagerly searching for lending opportunities. Barclays reports that private credit funds currently have a record $430 billion of capital awaiting deployment, accumulated over five years of rapid growth.
While private equity firms have historically been the primary partners for private credit funds, banks hold unique relationships with other privately held entities, like family-owned businesses, which may not be as visible to direct lenders.
For instance, Ares Management Corp. (ARES, Financial), a significant player in the $1.7 trillion private credit market, sees value in banks' ability to serve as a comprehensive resource for firms seeking any form of capital. This was demonstrated when Barclays aided Press Ganey in securing $1 billion of preferred equity, and Goldman Sachs facilitated a similar arrangement for Blackstone Inc. (BX, Financial)-backed Encore Group USA.
Citigroup has leveraged its leveraged finance relationships to privately place $275 million of first lien notes for Pitney Bowes Inc. (PBI, Financial), and a $516 million first lien term loan for Gannett Co. (GCI, Financial), showcasing the bank's ability to navigate the private market effectively.
For banks, shifting towards advisory roles and partnering with direct lenders presents a strategic method to mitigate risk and generate additional revenue during periods of reduced deal activity, without the need to directly lend capital.
Despite the growth in advisory services for private credit, neither Citigroup nor Goldman Sachs is looking to expand their teams specifically for this purpose. Instead, they are integrating these services into their existing operations, indicating a strategic, rather than expansive, approach to this market segment.
