Private Equity Wants Everyone’s Credit Card Debt

Either the sun is setting really low or shadow banks are growing.

According to a Wall Street Journal feature published Thursday, the private equity industry is keen on credit card debt, mortgages, car loans, and every other nook and cranny of the consumer debt and “asset-based finance” economy.

Bank Heist

When the banking industry descends into crisis, private equity giants are sure to step in. And like the 2008 financial crisis before it, last year’s small and regional banking crisis gave PE groups already dipping their toes into consumer debt the signal to dive in. The motive is simple: Asset-based finance can be repackaged as, in the words of the WSJ, “complex instruments with investment-grade credit ratings” that can then be sold to major institutional investors like pensions and endowments, offering private equity a new channel of growth.

By the end of 2022, private fund managers had already raised around $1.5 trillion from clients to invest in private debt, according to the WSJ’s analysis of PitchBook data. After Silicon Valley Bank’s implosion last year, many similar-sized banks and upstart fintech groups wanted to offload some private debt — and private equity pounced, sparking a wave of deals:

• Last June, KKR bought as much as $44 billion of buy now, pay later loans from PayPal, and in December it bought over $7 billion of recreational vehicle-backed loans owned by BMO. Blackstone, with the Canada Pension Plan Investment Board, scooped up $17 billion of mortgages from Signature Bank’s liquidation sale; Blackstone also recently bought over $1 billion of credit card debt from Barclays.
• Apollo, meanwhile, acquired the entire asset-based finance division of Credit Suisse, which was the top office for such business on Wall Street. Goldman Sachs’ short-lived consumer lending unit Greensky, and its $8 billion of loans, was purchased by KKR, Pacific Investment Management, and Sixth Street.

Debt Bet: Atalaya Capital Management estimates that if private equity pours in as quickly as it did corporate lending, its consumer debt business could nearly triple to $900 billion in just a few years (an estimate that didn’t even include residential mortgages). That may raise some concerns. “An ever larger proportion of lending will be concentrated among a small group of large, influential asset managers,” Moody’s Ratings wrote in a report this week. “This will only fuel their influence in the economy.” If the words “mortgage-backed securities” still make the hairs on your arms stand up, get ready for a world of “RV-backed securities.”