Robert Griffith 00:06
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value in an ever-changing world. Today, we are looking at one of the biggest opportunities in global finance, the rapid expansion of private credit and its role in shaping the 30 trillion market opportunity. Private credit has evolved from a niche alternative into a mainstream source of capital, providing issuers with flexible financing solutions at a time when traditional funding channels are evolving. As companies seek new ways to optimize capital structures, access liquidity and fuel growth, private credit is becoming an increasingly critical tool. So, where are the biggest opportunities emerging? How is private credit reshaping the financing landscape, and how is RBC positioned to support issuers in accessing this evolving market? To break it all down, I'm joined by Eric Wise, Head of Alternative Finance and Jason Goss, Head of European solutions and structured products. Good to have you both here.
Jason Goss 01:21
Yeah, great to be here.
Eric Wise 01:22
Thanks for having us.
Robert Griffith 01:24
Again. Welcome guys, and let's get right into the private credit opportunity. Private credits rapid expansion has been driven by strong demand, but as the market evolves, so do the opportunities and challenges at RBC. We are thinking a lot about how to just not let me start over at RBC. We're thinking a lot about how to not just participate in this growth, but to help shape and facilitate it, from what makes the market attractive to how we're positioning around that growth, what are the key dynamics at play, and where does RBC fit into that picture today? Eric, what are your thoughts?
Eric Wise 01:58
I think in order to kind of put the private credit market into context, it's important to roll the hands of time backwards. So, if you sort of think a little bit about when the real growth in private credit really started, it was following the global financial crisis. And leading up to the global financial crisis, there were things that could arguably be considered private credit, securitization, things like that. But coming out of the global financial crisis, there were enhanced regulations put onto banks and that really led to a couple of things. It led to a more expensive balance sheet for banks, as banks were required to hold more capital and subject to greater regulation and greater risk weighted assets but also, as a result of that, there are instances where the economic capital associated with a loan, for example, is materially different than the regulatory capital associated with the same loan, and when those two things diverge the market becomes very, very efficient, and in comes the direct lender, or the private credit lender, to fill a hole as the bank balance sheet cost became more expensive. The provision of credit to the end user, so middle market companies, these could be companies with, earnings anywhere from as low as $5 million to over several 100 million dollars per annum, they still need the provision of credit. And for banks, they're just instances where it's just uncompetitive. And so we saw the emergence of the private credit direct lender step in, and they were very, very successful. They were very successful for a variety of reasons. One, they understand credit. Two, they were providing terms that were aligned with what borrowers were really looking for, which is tenor, competitive pricing, sort of reasonable covenants, things like that. But probably just as importantly as they learned the lessons of some of the business models that were buying long-term assets with short-term funding. And that short term funding could come with the opportunity for an LP in a fund to ask for their capital back. And so, they changed the way that they were organized to have a much more durable asset liability mix. And so, the combination of having long-term capital and filling a hole where banks were becoming uneconomic really led to that private credit boom. And since then, they've been able to attract staggering amounts of capital from third party investors. Could be sovereign wealth funds, pensions, endowments, etc. And so, the fundraising machine continues to be very, very strong. The business model is very, very durable. The demand for the product that they're providing continues to be very, very high, and the space in which they operate separates them from the regulated financial institution. So, sort of a long-winded way of saying that the kind of themes that led to the emergence of private credit are still very much there. And I think the private credit market holistically continues to have very strong tailwinds. So, I think this is a market that's going to continue to grow as a proportion of the overall capital markets is likely to capture more market share. And as a bank, I think we have a tremendous opportunity, particularly because we have all the capabilities at RBC, to serve our clients where it makes sense for us to use our balance sheet and our advice and our distribution and to not worry too much about potentially being disintermediated.
Robert Griffith 05:39
Super informative. Eric, that was great. Question for you. Private credit has been long centered in the US, but we're seeing a growing global interest, both in terms of capital inflows and market participation. How do you see the opportunity evolving across regions, and what's driving that next phase of growth?
Eric Wise 05:59
I think that it's important to look at it from two dimensions. It's important to look at it from the originators perspective. So that would be the entities that are originating private credit, for example, in Europe or Canada or Asia, relative to the US. And then there's the perspective of those that are investing in private credit. And so that could be somebody that's looking for levered exposure to private credit. I think the opportunity for investors globally to participate in the private credit market is probably greater than the opportunities for originators to grow at the same pace and scale as the US. That said, I think that the nature of a private credit loan or exposure in those regions may be slightly different than what we're seeing in the US, but I expect that to continue to grow. And certainly, our clients are raising funds at a really attractive rate. Deployment of those funds is a little bit challenged, and we can sort of talk about that relationship to private equity, and some of the things with the rate backdrop and some of the uncertainty that's going on as we have things like tariffs and tax, tax policy. But I do believe that, over the next five to seven years, there's going to be a significant uptake in the creation of private credit in regions outside of the US.
Jason Goss 07:20
And if we go back a couple years, and we would have looked at what growth rates were estimated at the time, there are some fairly aggressive estimates of market growth within the private credit space. When we look at the actual growth rate in the markets, it had actually far exceeded what was already an embedded, estimated, aggressive growth rate two years ago. A lot of talk about whether or not it's a bubble. I think most people that you'd speak to say it's not a bubble. Some will say it's actually just the beginning. And what's interesting when we look at a global context is actually that the more global growth following what's happened in the US. But we're certainly seeing an uptick in in all of these markets, expanding in Europe as well. If you measure the size of market by the breadth of participant firms, we start getting into more types of participants. People are seeing their greater potential for returns in this space. There's more return dispersion in private markets, less liquidity, and all these things that might be a little daunting a number of years ago, where actually the things are quite attractive at the moment. So I think that the growth rates that we're seeing to normalize what we see on a global basis relative to what's been US centric is only going to keep continuing over the coming years.
Robert Griffith 08:33
You guys have clearly the opportunity pretty clear, and I've set a great stage for my next question. Let's talk a little more internally. Where does private capital sit within RBC’s business today, and how does this align with our broader strategic objectives? How do we connect the dots across the private credit and private capital ecosystems?
Eric Wise 08:54
I think that the really nice thing about private credit and private capital, as it aligns with RBC, is that we're fundamentally a full-service provider of capabilities when it comes to the private capital ecosystem. So, we help our clients raise capital that they may in turn invest. We advise them on how to be organized, potentially divest themselves of a business line, or purchase an asset manager, things along those lines. We have tremendous balance sheet capabilities, some of which are market-value based, some of which are loan-based. But one of the nice things about RBC is the loan product is really sort of a cornerstone of what we do in capital markets. And if you think about it from that perspective, the amount of expertise that that we have across the firm, which is really sort of the fundamental expertise that you need to be successful in this market, is really in abundance at RBC. And the support from management to attack this sort of opportunity over the next five to 10 years is really quite significant. And so, we are very well positioned. I think the challenge and both the opportunity for us is to constantly reevaluate the way that we're organized, our client coverage strategy, and then the integration and coordination of our product capabilities to really deliver high impact solutions to our clients that that go after their top priorities. So, I feel fantastic about our ability to capture what is almost certainly going to be one of the most meaningful growing markets in capital markets, and for us to create alpha, if you will, which is to outperform our peers in terms of grabbing market share and revenue growth.
Rob Griffith 10:36
Jason, what are your thoughts?
Jason Goss 10:37
Yeah, if, if you look at it from a client perspective, in terms of what are clients looking for from RBC, and I'll roughly categorize them there's the advisory side. Clearly, there's the financing, and there are many, many different forms of financing and lot of innovative structures that come with the financing, in terms of how are we going to structure things that are optimal for our clients’ objectives? Then there's the risk management associated with it, something that we kind of term as our ‘solutions approach,’ and it might be market risk management. Might be risk reformatting. It could be structuring, and that's where the power of our balance sheet comes into play. Let's take, for instance, if we have a client that's trying to access a certain investment, but there might be an element of risk reformatting to put it into the format that's optimal for their balance sheet. That's where ours can come into play. And there are different ways that we can do that, looking at things from a structuring perspective. But there's also consistent questions around asset sourcing. These are very asset hungry clients that we're speaking to, very acquisitive looking for differentiated investment opportunities. So, from our perspective, when it when you ask, where is it in the ecosystem? It is in so many places, and the real challenge is how you can pull it together and coordinate it in the best way to deliver for your client set. How can we bring our balance sheet from both a servicing perspective, a financing perspective, a risk management perspective? How can we bring our thought content from an advisory perspective, and then how can we bring opportunities that are meaningful to a whole host of different clients in different regions, with different types of capital they're looking to deploy different objectives and sometimes different constraints that we need to structure around. So it does bring into play all of our business lines across the investment banking space, across the market space, and across various desks within markets, and that's what makes it so attractive.
Robert Griffith 12:27
Really helpful. Lightly pivoting. What types of credit deals are out there today that we're seeing, and how are they going to be different also two, three years from now? So let's talk about the present and maybe where we're going.
Eric Wise 12:40
Maybe to answer that question, I'm going to sort of go back a few years. Most of the time when people were referring to private credit they were really talking about loans. So, you have a direct lender that is not regulated, like RBC, providing a private loan to a borrower, and maybe that loan replaced a broadly syndicated loan that, three or four years before that, RBC arranged and distributed into the loan capital markets. That was really the bulk of what I think most people associated with private credit, and a lot of that lending was related to private equity driven deals. But as we've gone through a very significant increase in rates that have stayed high for a long time, what we're finding is that private equity firms, the velocity at which they're turning over their portfolio companies and therefore needing new private credit has slowed quite significantly. And that will change over time, but private credit firms that have attracted capital to deploy have nonetheless use their credit expertise to expand beyond the loan asset class. And so what we're seeing today is clearly still a focus on loans as a private credit asset class, but also the expansion into things that we do particularly well in terms of origination and lending, and I would consider it to be akin to securitization, where the private credit firms will provide some form of financing against a diversified portfolio of assets that are not necessary loans to leverage borrowers. It could be loans to asset classes like digital infrastructure, real estate, things along those lines. And so, the expansion of the definition of private credit has really gone beyond traditional corporate credit to things that would be more associated with securitization, and they're finding, as we have over the years, that the there's a very favorable risk return relationship associated with these types of transactions. So, we're seeing more opportunities to participate in the private credit market. And I expect that, the financing of the alternative asset ecosystem will continue to grow, and that that's probably more associated with what we think of today as fund finance, so: pooling nav loans, pooling LP interest, pooling GP interest; all that sort of makes that private capital ecosystem flow, I think will continue to move into the private credit market. And, of course, just general asset classes. Digital infrastructure as being something that holds a lot of promise going forward, real estate of course, hedge funds, those types of broader asset classes will likely be consumed in what people refer to as private credit.
Jason Goss 15:30
I was just going to add on to what Eric was saying in terms of the focus on loans. And again, if we go back into time, a number of years ago, where private capital firms were mainly going to direct to originate assets and seeking loans, indirect loans, et cetera. The newer evolution in the more recent framework that we view as private capital firms are partnering with banks, mainly trying to originate and source cash flows, raw cash flows. Those cash flows can be associated with a whole host of different asset classes. These are the credit investing experts. This is where they show their superior investment decision making in terms of analyzing the credits associated with those cash flows. So, it can be anywhere from equipment finance to consumer finance to mortgages to credit loans, high yield loans. Regardless of the source of cash flow, it's the consistency whether or not it needs to be rated, how it's structured, but it's really moved in to show us those consistent sources of cash flows, which is also why we see private capital firms acquiring origination platforms. Like they're going direct to source, they're looking for all the various sources that we can bring cash flows together, and again, use the structuring techniques or securitization techniques or sourcing techniques.
Robert Griffith 16:43
Really helpful, guys. It was really interesting how you talked about the innovation and the cross-product solutions that RBC is providing, and as the private capital market is maturing, the capital markets are the key to scaling that. Final thoughts on two, three years forward as far as innovation or additional cross-product opportunities.
Eric Wise 17:07
I would say on the innovation side. I believe that the competitive advantage that we as a financial intermediary have in the private credit market really stems from the extensive client relationships that we have, both on the issuing and investing side. So, if we think about how much private information we consume on a daily basis, that, if reconfigured, will help us enhance our origination strategy, will help us advance the way that we deliver our balance sheet, will help advance the way that we deliver the distribution of risk to other market segments. That, to me, is really the key to our growth rate. And if I think about sort of information as being the most valuable kind of commodity in the in the private credit, in the private capital ecosystem. That then leads me to AI. The opportunity for both innovation and capturing market share is our ability to leverage all of the work that's being done today in the AI space with what is a stunning amount of private information. When I meet with clients, they know their business well, they're covered by our competitors. So, they have sort of the benefit of seeing different product offerings from our competitors, which we won't see. What we have the benefit of is seeing what our clients are doing, which is their peer group and their competitor space. Our ability to take in what's going on away from a client that we may be speaking with, and then reconfigure that in terms of strategy, advice, tactics, meeting their priorities, I think is going to lead to tremendous innovation. And so, I think innovation is going to be very difficult to predict. I think what's going to drive innovation. I think is pretty obvious. And I think our commitment to AI as a firm is going to be a competitive advantage. And then if you couple that with our expansive client set, significant balance sheet and significant distribution capabilities, I think we're incredibly well positioned.
Jason Goss 19:15
And maybe another thematic in terms of innovation, where we're focusing a lot of our efforts would be around risk transfer, and there's a lot of discussion in the market about originate to distribute models or risks for cycling different ways of terming it. But if you strip it down to the core, as banks are shifting to more asset light models, more generally on the street, I think RBCs differentiating the fact that we're very asset acquisition. We are different from that perspective to a lot of other banks but also keeping pace with what clients are expecting banks to do in terms of sourcing assets and delivering assets in their in an appropriate format. We spend a lot of time looking at our risk transfer technology, and that can be anything from issuing SRTs, it could be anything to like some participation agreement under an LMA construct. Or it could be, do we buy an asset, put it on balance sheet and do a funded TRS into a into a client? So, there are a whole host of different risk transfer techniques that work on what would be on RBC’s balance sheet, or what we need to put on balance sheet and then transfer to client. But it all comes back down to that element of, how do we optimize the structure for our clients, investments, needs and objectives, what suits it? So, a lot of where we're looking at innovation would be on, how can we format products? Maybe it's into an insurer in a regulatory approved format for the optimal capital structure.
Robert Griffith 20:35
Eric, Jason, it's great to see us proactively thinking about the forward needs of our clients as this market continues to just evolve at such an incredible speed. Maybe we'll call it a wrap for today. Really enjoyed speaking to you two.
Eric Wise 20:50
Thanks for having us.
Rob Griffith 20:58
You have been listening to Strategic Alternatives, the RBC podcast. This episode was recorded on May 30, 2025. Listen and subscribe to Strategic Alternatives on Apple podcasts, Spotify, or wherever you listen to your podcasts. If you enjoyed the podcast, please leave us a review and share the podcast with others. Have a great day.