The massive new position for personal credit score | USAEMALL.com

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The author is vice-chair at Oliver Wyman and former global head of banks and diversified financials research at Morgan Stanley

As we confront the need for huge capital expenditure for data centres, energy and the reshoring of industry to domestic markets, the open question is: who is going to finance it?  

Freshly emboldened US banks look set to take some of the opportunities under the more benign regulatory backdrop of the new administration in Washington. The sector’s share price gains since the US election suggest investors expect there will be more leeway in general to deploy capital more profitably. Morgan Stanley estimates that if the so-called Basel III global rules for banks are implemented in the US in a “capital neutral” way — that is with no net increase in capital demands — it could free up more than $86bn of capital for the top 12 banks for financings or buybacks.

My contention is, nonetheless, that leading private credit players, teaming up with insurers, could bridge an increasing portion of the finance needed for the coming investment demands.

The top seven listed private credit groups now have $2.1tn in credit assets between them, including infrastructure and real estate debt. But traditional private credit markets are becoming more crowded and are likely to become increasingly picked by banks as they put more capital to work in large loans for leveraged buyouts and other deals.

As a result, some private credit companies are striking out for greener pastures. Leading players are pivoting to become less dependent on mid-market lending and acquisition finance and starting to become financiers of the huge capex needed for data centres, the energy transition and other hard assets.

The US is expected to see more than $1tn invested in data centres over the next five years, with an additional $1tn invested internationally, catering to the surging demand for cloud computing and artificial intelligence applications, according to Blackstone. The energy required for all this will require additional investments — as will the transition to greener sources of power and increased energy demand in general.

Apollo Global chief executive Marc Rowan argues we may see private project finance deals as big as $15tn to $20tn in the next year. These assets are complex, long-dated and demand innovative financing solutions that do not always easily align with traditional banking or debt markets. 

Private credit at present only accounts for about 5 per cent of the $5.5tn speciality finance market, according to Oliver Wyman. And the share is even lower for energy infrastructure. However, a profound shift in the funding model of private credit is now spurring expansion.

Our research suggests private credit assets funded by insurers at the top seven listed private market players now account for 43 per cent of credit assets held by these companies, up from 32 per cent at the end of 2021. This provides a source of long-term, stable capital to invest. Put another way, more than half of inflows in 2024 came from insurers.

Insurers require investment in long-duration assets that are inflation-resistant and high quality. Indeed, BlackRock chief financial officer Martin Small has spoken of the potential to flip 10 per cent of its $700bn insurance assets from core fixed income to private credit. This was a key part of the rationale of BlackRock’s $12bn acquisition of private credit group HPS. Northwestern Mutual also struck a deal with Sixth Street to manage $13bn of its assets.

Such insurance capital is transforming the type of projects private credit can back. For example, insurers prioritise steady 7 to 9 per cent returns that align well with the needs of long-duration infrastructure financing. In some ways, this represents a return to an older financing model. After the second world war, large insurers financed and even owned transformative infrastructure projects and utilities. 

But spare a thought for Europe, which also has huge infrastructure needs but has straight-jacketed insurers from playing a larger role in financing the real economy via private credit or through buying senior tranches of securitisations. US data centre securitisations have totalled $24.3bn since 2018, according to JPMorgan Chase, while the EU has yet to see its first such transaction. Similarly, while US solar securitisations have raised $27bn since 2018, the EU saw its first in 2024 at €230mn. 

Recalibrating insurance, securitisation and private credit rules — as called for by former Italian prime minister Mario Draghi and as I argued in these pages last year — should be a priority for Europe if it wants to boost its infrastructure investment.

More broadly, there are numerous risks to navigate in the provision of private credit for coming investment needs such as the quality of borrowers. But the US private credit market is likely to play a growing role in financing the capex boom.