“There is a growing realisation that there is a wider ecosystem for everyone to work together here.”

The exponential growth of private credit in the past few years may have raised concerns about competition with traditional lenders, but a growing number of partnerships between the two highlight the potential for a mutually beneficial relationship.

At the recent FT Live Global Banking Summit, discussions about the future of the banking and private credit sectors focused on this shift in dynamics. By working hand in hand rather than in direct competition, banking and private credit players can capitalize on a significant volume opportunity.

Private credit’s evolution

Although private credit was historically seen as the lender of last resort - in many cases operating in situations that were riskier than banks were willing to tolerate - the industry has grown significantly in recent years, with funds estimated at $2 trillion to $3 trillion.

Regulatory arbitrage has played a role in this evolution – private credit is less regulated than traditional lenders as the latter hold retail deposits. However, that is only one part of the picture. Increasingly, there is recognition in the industry that there are opportunities in the wider financial ecosystem for each to complement the other.

Capital velocity is also an important factor. There is a desire to move balance sheets much faster than has historically been the case.

In many ways, a win-win

Much has been made of banks potentially losing income because of the rise in private credit, but the reality is there is a significant opportunity for them to benefit from faster balance-sheet recycling and fee generation via partnerships. In this model, banks will continue to maintain and service their customer transactional relationships, thus strengthening customer loyalty and retention.

Private credit providers, meanwhile, can leverage the wide distribution networks that banks have established to lend the large amounts they have raised to a more diverse group of clients.

Partnerships allow both sides to leverage complementary strengths. Private credit providers can offer flexibility and a legacy of complex and rigorous underwriting in high-risk lending situations, while banks can bring senior leverage to the table.

So, while banks may have given up some fees and interest from direct lending opportunities in the short term, in the long run, it can become a volume play that leverages joint capabilities and broadens the market for both.

Overblown risk concerns

While the notion of private credit operating in a less regulated environment has sparked debate about systemic risks, these worries are unfounded given the intensive, rigorous scrutiny that high-risk lending necessitates.

The legacy of most private credit providers in dealing with complex situations has by necessity, equipped them with deep underwriting capabilities and skills at both a financial and operational level.

Looking ahead

The partnership model for banks and private credit firms marks a major shift in the relationship between the two – from competition to symbiosis. Harnessing the best of both worlds can result in increased lending opportunities across the wider ecosystem. We expect this trend to continue in the next year and beyond.

Could the strong investor appetite for mid-market corporate debt, the banking sector's move to higher capital velocity models, and the ever-increasing regulatory pressures, signal a lasting collaboration between banks and the private credit? A&M's EMEA Co-Head of FSIG, David Edmonds, joined Cerberus Capital Management's Head of Global FIG Advisory, David Teitelbaum, and Blackstone's Senior Managing Director and European Head of Private Credit, Michael Carruthers, at the FT Live Banking Summit. Watch the conversation below: