From disruptor to mainstream
Private credit has reshaped the lending landscape and become an established feature of the market. Globalization, technology, deregulation, and a global pension crisis are all factors that have driven its rapid ascent in the last few years.
Yet just a couple of decades ago, Doug Ostrover found it hard to convince potential clients that his new ‘alternative credit’ platform could work.
“Everyone we met with said, ‘How are you going to disintermediate the banks?’” Ostrover recalls.
That first business was later acquired, but by the time Ostrover founded his current firm, Blue Owl Capital, attitudes were very different. “Today, you’d be hard pressed to go to any institutional investor that doesn’t have an allocation to private credit,” he observes.
“Our capital in a normal market is good. In a market where there’s turmoil and nobody else is lending, it becomes great.”
Doug Ostrover, Chairman and Co-CEO, Blue Owl Capital
Jim Zelter, President at Apollo Global Management, matches Ostrover’s 40 years in the high-yield market. He points to private lenders’ ability to step in during periods where financing has been unavailable elsewhere.
“If we were not solving a need for investors and borrowers, we wouldn’t be here,” he says. “It’s no mistake that the area of the globe where the economy is doing so well has embraced private capital across many different industries – and that’s in the U.S.”
According to Ostrover, U.S. politicians like having anothersource of capital available when bank financing dries up, which happened during Covid-19 and the steep interest rate increases of 2022. “Our capital in a normal market is good. In a market where there’s turmoil and nobody else is lending, it becomes great.”
‘Alternative’ covers a wide spectrum
Both Zelter and Ostrover believe the ‘alternative credit’ label for their products has had its day. TheyAs Ostrover points out, the term incorporates everything from a hedge fund targeting the highest returns to a senior secured loan fund.
He believes the industry needs to do a better job of differentiating products by their point on the risk spectrum.
“It’s called an alternative and so that gets everybody nervous,” Ostrover says. “Yes, you’re giving up some liquidity, but we’re actually offering something that’s a little bit safer.”
Zelter agrees the term is anachronistic. Alternatives in the future, he says, will range across the whole spectrum of higher-risk solutions for companies and investors.
The fast-evolving regulatory landscape for traditional banks has played its part in private credit’s rise, but Zelter maintains that private credit itself is highly regulated too. He says private lending has played a role in the healthy state of the U.S. banking system compared to its European counterpart.
“I believe that this industry has created less systematic risk by deleveraging and getting loans and non-investment grade credit – and, in the future, investment grade credit – out of the consolidated banking system,” he says.
Scale supports continuing success
Both Apollo and Blue Owl now enjoy the advantages of scale. Ostrover says it was always Blue Owl’s aim to be a lender “at the top of the pyramid”, since bigger creditors have more levers to pull if a problem arises.
“It’s an identical amount of work to make a $50 million commitment versus a $500 million commitment in terms of underwriting,” he adds, “so there’s just incredible economies of scale.”
Winning the war on talent is another advantage of being a giant in the industry, Zelter says: “When I started, the best and brightest were at the top investment banks. I think today they are in our business on the buy side.”
One of the challenges of such scale might be finding ways to deploy huge amounts of capital, but both argue this is not an issue in practice. Ostrover says Blue Owl rejects over 95% of the 16,000 to 17,000 deals it reviews annually, because they do not meet its criteria. “It’s all about having a very big deal funnel,” he says.
Public/private line begins to blur
Both Zelter and Ostrover still emphasize their partnerships with the banks. They differ, however, about the feasibility of blending public and private markets to enhance transparency and pricing.
Apollo is focusing on “fixed income replacement”. Given tight spreads in the investment-grade market, private credit in fixed income portfolios will be a growth engine, Zelter says. “Investors are asking for it,” he adds.
Ostrover reflects on his experience of setting up a listed institutional pool with daily liquidity at a point when this type of product was largely limited to wealth channels. He found institutions disliked periods of volatility when trading dipped below net asset value.
“We’re still in that space. We love that space, but we realized that part of what people like about this asset class is that it always trades in and around NAV,” he says.
Tech will transform a growing market
In the future, Ostrover sees huge opportunity. Wealth savings are expected to reach $300 trillion by 2028-2029, and he see the potential for alternative investments to take $60 trillion of that market.
He expects artificial intelligence to provide “a tremendous technological gain” in terms of productivity in the private credit space.
Zelter predicts consolidation, with a handful of select firms dominating the space in five years’ time. He also sees an evolution beyond the public-private convergence: “There will be a much broader commentary about private market solutions across equity and fixed income.”
