Business of Law Firms
Private Credit​

By Jake Rickman​

What do you need to know this week?

This week’s The Business of Law Firms series is all about private credit.

An article published by Law.com on Monday details the explosive growth of the private credit market and its impact on the world’s largest law firms.

In short, the article suggests that law firms which cultivate the best relationships with private credit funds stand to benefit hugely from the asset class’s continued growth into the future.

To appreciate the significance of this appraisal, it is helpful to understand what the private credit market refers to.

What is private credit?

You can think of private credit as private equity’s cousin: like private equity, private credit funds raise money from several other investors like pension funds and insurance companies. But rather than use the pooled funds to buy shares in a private company, the private credit fund loans money to private companies, usually on bespoke terms. (Though these days, the private credit market also loans to public companies).

As the Law.com article notes, the value of private credit transactions grew from $500m in 2015 to $1.4tn by 2022. This is a staggering figure: a growth rate of 2,800x in less than 10 years, and it resembles private equity’s meteoric growth between 2010 and 2018.

The reason behind the growth is that traditional bank lenders like JPMorgan and Goldman Sachs have largely stepped away from all but the biggest corporate lending markets (“syndicated lending”) due to regulatory reforms following the 2007-08 Global Financial Crisis (GFC).

The banking industry’s perception has been that lending to smaller companies is too risky. This left a funding vacuum, where mostly private companies need relatively large loans but could not find any lenders prepared to lend to them.

Who are the private credit investors?

Investment funds like Apollo, Bain, Ares, and Oaktree were some of the first big private credit investors in the early years. They had ample prior experience raising and deploying private equity funds (as well as in other asset classes like real estate and distressed opportunities). This made it easier to raise large private capital funds because they had an in-place co-investor network that they could readily tap.

Private credit was then and remains a particularly attractive asset class for co-investors with lower risk tolerances like pension funds and insurance funds. This is because loans are inherently less risky than buying shares in a company on the basis that a company must repay its debt investors before passing on any profits to shareholders.

At the same time, private credit can offer investors higher rates of return than traditional bond markets (a favoured home of lower-risk institutional investors).

In more recent times, as interest rates have soared, so have returns on private credit. This is because private credit funds can lend to borrowers at higher interest rates, which increases the return on investment. Consequently, returns on private credit funds today more closely approach that of private equity. You can therefore see why, according to a McKinsey report, private credit fundraising has increased in 2022 while private equity and real estate fundraising have fallen as much as 23%.

How is this topic relevant to law firms?

As Law.com’s article makes clear, lending used to be the domain of institutional investment banks. Banking & Finance teams at large law firms therefore had to foster and maintain close relationships with senior investment bankers so that they might be instructed to advise the banks on loan transactions.

However, given the fundamental shift in the lending market away from institutional lenders to private credit funds, Banking & Finance groups need to stay close to the new lenders — the private credit funds — if they wish to participate in the lending market. This requires pitching and winning business from a larger and more diverse pool of lenders (the private credit funds).

Why is this important for your interviews?

If you are interested in Banking & Finance law, this is a great topic to study in more detail. You will impress interviewers if you can succinctly articulate how the lending landscape has shifted over the past decades and what challenges and opportunities this creates for law firms.

For instance, given American law firms have traditionally dominated the private equity market, what does this mean for the balance of the market share in private credit opportunities for UK vs American firms?