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  • Writer's pictureShernel Thielman

Private Credit Firms Build Cash Hoards to Gain Share of $5.2 Trillion Consumer Debt Market

Private credit firms are raising substantial funds to tap into the $5.2 trillion market encompassing US consumer debt. These firms, including Ares Management, BC Partners, KKR & Co., and Medalist Partners, have secured investments for funds aimed at lending to consumer financing companies. The move comes as traditional lenders in the industry face disarray, leading to an opportunity for private credit firms to generate higher returns for their investors and diversify their offerings.

The current environment has made it challenging for auto and consumer loan providers to access traditional funding sources like regional banks and securities sales. As a result, private credit firms are stepping in to fill the gap. These firms are deploying raised capital to purchase consumer loan portfolios from regional banks that are now looking to boost liquidity after facing depositor and shareholder concerns earlier this year.

KKR, Varde Partners, and other firms have acquired debt portfolios from banks such as PacWest Bancorp and Synovus Bank. The shifting landscape has led to increased interest from private credit firms, as they see an opportunity to take advantage of the less crowded space left by retreating regional banks.

Private lenders are capitalizing on the credit market's disruption, expanding their industry which is currently valued at $1.5 trillion. This strategy may provide them with greater pricing power over consumer debt. Traditional asset-backed securities (ABS) markets, once a reliable source of funding, have become less accessible due to rate volatility and rising borrowing costs.

Consumer finance companies, like Upstart Holdings Inc. and PayPal Holdings Inc., are turning to private lenders to raise capital, bypassing the troubled ABS market. This trend suggests that banks are retreating from consumer credit, which could eventually lead to higher borrowing costs for consumers.

Although this opportunity offers significant potential, private credit managers acknowledge the unique risks involved in assessing the quality of diverse loan portfolios. Despite the challenges, these firms believe that specialty finance lenders are well-positioned to capture a larger share of the market and may eventually lead to private ABS origination.

Investment Disclaimer:

The provided information is for general informational purposes only and should not be considered as investment advice, endorsement, or recommendation. Investing in financial markets, including credit markets, involves inherent risks. Past performance is not indicative of future results. It's essential to conduct thorough research, independent analysis, and consult with a qualified financial advisor before making any investment decisions. The accuracy, completeness, or reliability of the information is not guaranteed, and no liability is assumed for any loss or damage arising from reliance on it.

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