VIEWPOINT: Private credit and modernisation - the impact on equipment finance
The influx of private credit funds into asset and commercial finance over the last few years represents a significant shift in the sector. This growth has taken several forms, including partnerships and direct and indirect lending, and traditional banks are recognising it as a competitive threat - and they’re aware that it’s not going away anytime soon.
The private credit advantage
Private credit firms seem well positioned to capture market share from traditional banks and independents, at least in the short term. They have many apparent advantages over the traditional banks, with a flow of readily available capital, perhaps secured and leveraged by those banks themselves, but also coming from more innovative funding sources which only become more prevalent as private credit success is called out; for example, ETFs and large family funds.
They also have operational flexibility, not only on funding, but also around risk appetite, industry focus, and product structure. They can therefore pursue new business and portfolio opportunities that do not meet the lending criteria for regulated, publicly traded larger banks that answer to shareholders. There’s also the impact of capital requirements on larger banks, which now need to generate the same returns from a lower level of RWA - regulation that doesn’t apply to private credit.
"Private credit enterprises are like big cats; when hungry they need to be fed, so when an opportunity arises, they must act fast."
A history of collaboration
But there’s another side to this story. Private equity and credit funds are not new, and the collaboration with banks is hardly a recent phenomenon. Long before today's push into equipment finance, private equity and credit funds partnered routinely with banks across a range of products. When I traded convertible bonds at a hedge fund, for instance, we supplied liquidity that let large banks place new issues without parking them on their own balance sheets - saving capital and earning the banks fees.
Furthermore, banks also engineered structures such as dividend swaps to offload specific risks - for example, the threat of dividend hikes embedded in their derivatives portfolios - to eager private credit counterparties. These are just two of many examples that show how banks and private credit have worked together comfortably (and profitably), making the latest entry into equipment finance a logical next step, rather than a radical departure.
"Large banking organisations can mobilise extensive resources overnight, issuing multi-billion dollar deals with innovative structures involving many departments and centres of excellence."
Complementary strengths
Traditional banks and private credit firms operate with different abilities and incentives. Banks are perceived as slower and more cautious, but this stereotype overlooks the strengths and advantages that have made them successful for many generations. Banks understand extremely well how to take advantage of private credit interest in the equipment finance market.
Having worked on both sides, I’ve witnessed the capacity of large banking organisations for rapid execution when circumstances demand it - and the results can be remarkable. They can mobilise extensive resources overnight, issuing multi-billion dollar deals with innovative structures involving many departments and centres of excellence.
One of the key facilitators in all this is scalable, robust technology that allows real-time reporting and flexible, accurate risk monitoring and pricing.
"Investors don't want the steady 2-3% return over 10 years - they demand short-term growth and double-digit returns."
Private credit imperatives
Private credit enterprises face investor demands for short-term growth and double-digit returns. Investors in this sector don’t want the steady 2-3% return over 10 years delivered by traditional equipment finance portfolios, so they are driven to acquire new portfolios, structure leveraged transactions, and sell on what they no longer want.
They are like big cats; when hungry they need to be fed, so when an opportunity arises, they must act fast. And they’re open to anything - a gazelle, a deer, or a rabbit - so if they lack sufficient field expertise, must quickly grasp the profile and necessary details to make a decision. This requires accurate data on their current risk levels, the risk of the portfolio, what capital will be required, and what transactions might need to be lined up to mitigate this risk.
"Technology plays a key part in the success of private credit businesses."
Technology requirements
Technology plays a key part in their success. Private credit businesses need a platform that can be configured by operations users to take on new product types quickly, and provides decision makers with a clear, consolidated view of the metrics that matter to them and their investors.
Rather than accurate regulatory reporting, they require powerful MI and data analytics as well as technology tools that aid automation and quick decisions - including AI-driven automation. It is crucial to be able to extract granular, position-level data in real time, and to be able to stress-test this under a variety of scenarios, so private credit investors can react quickly to potential changes in the market.
Also key is the ability to upload entire portfolios into a production-like environment at the click of a button; to model, understand, then potentially discard. Being able to do this gives private credit firms faster decision-making and a competitive edge; while a deeper understanding of potential acquisitions allows accurate pricing and risk modelling, ensuring better returns.
"Banks have the power, and sometimes the global network, necessary to maintain a supply of new deals to feed these beasts."
The banks' opportunities
Banks, too, can take advantage of this appetite. They can be secure in the knowledge that their shareholders have longer-term horizons. They have trusting, long-standing relationships with clients and the ability (and obligation) to service all their needs, whether for stable equipment finance portfolios with low returns, or potentially more lucrative acquisition finance.
This is where we are seeing the main partnerships between banks and private credit. Banks have the power, and sometimes the global network, necessary to maintain a supply of new deals to feed these beasts. However, they need to ensure they can scale this originations function to meet this need. To be a good partner, they will need to source more and process the originated deals more efficiently.
Scaling originations
This scaled-up originations function requires technology that enables automation and easy integration of processes and tools, both internal and external. It must pull data from external sources like open banking, and harness AI to make real-time, bulk decisions on SMEs in a portfolio, aggregating sufficient summarisation for end investors. Intelligent document processing supports this further, by automating the validation, tracking, and generation of documents required to secure each transaction.
Banks will also need technology to support distribution across new asset classes, whether through syndicating equipment finance leases or securitising supply chain finance and ABL, while tracking positions in real time. While some of these tools may already be in place, delivering them at the required scale and flexibility will be critical.
"Partnerships are forming, and private credit has arrived - banks are clearly feeling the impact."
Strategic positioning
Partnerships are forming, and private credit has arrived - banks are clearly feeling the impact. Regardless of how long private credit firms stay before shifting to another asset class with higher returns, banks have a clear opportunity to benefit. They should use this moment to modernise processes within equipment finance, and reassess their optimal place within the broader ecosystem, making full use of their specialisations and long-standing global reach.
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