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Lloyds Banking Group has partnered with credit investment shop Oaktree Capital Management to finance UK buyouts, as the bank works to get a foothold in the burgeoning private credit industry.
Oaktree will provide Lloyds’ clients loans of up to £175mn to fund private equity takeovers and help refinance upcoming debt maturities. The groups hope to deploy £1bn over the next three years, drawing on Oaktree’s credit funds. Lloyds will contribute a portion of its own capital to finance the loans.
The venture is the latest in a string of tie-ups as traditional banks attempt to figure out their place in the $1.7tn private credit industry, which has seen the likes of Ares, Blackstone and Blue Owl become go-to lenders for private equity firms and a growing number of blue-chip companies.
Banks have largely watched the rise of private credit from the sidelines, with post-crisis regulations forcing traditional lenders to abandon some of the riskiest loans they once underwrote. Private credit shops filled that void in the ensuing 14 years and now routinely compete for the kinds of loans that were long the purview of regulated banks.
Bankers, worried they could lose clients and the resulting investment banking fees, are now working feverishly to find a place in the industry. A handful have decided to take that credit risk themselves, by holding these rarely traded loans on their own balance sheets. But a growing number have struck joint ventures with asset managers.
“This is a business we’ve been in for a long time . . . but it’s a business we need more support [and] more firepower to be relevant to our clients,” said James Ranger, Lloyds’ head of sponsors and structured finance.
The deals have provided a springboard for some asset managers attempting to build out their own direct lending businesses, giving them access to a bank’s clients without the need to hire dozens of underwriters to source new deals.
Nael Khatoun, an Oaktree portfolio manager, said the partnership would help expand the investment group’s direct lending business in Europe, which comes as the firm moves beyond its distressed debt roots. The firm, majority owned by Brookfield, now manages more than $190bn.
Barclays in April clinched a deal with investment group AGL to provide private loans to its clients, with backing from the Abu Dhabi Investment Authority. That followed Wells Fargo’s tie-up with Centerbridge in September, giving the fourth-largest US bank by assets a toehold in the business. Earlier this week, T Rowe Price’s Oak Hill credit investment unit partnered with Rajeev Misra’s OneIM to extend as much as $5bn in loans to European borrowers.
Ranger said the joint venture would allow Lloyds to fully serve its mid-market clients as part of the group’s wider strategy to “help Britain prosper”. The UK bank led by Charlie Nunn is two years into a £4bn strategic overhaul that aims to diversify its income stream away from traditional retail banking by growing new areas, including commercial banking.
Lloyds’ push into private credit also comes at a time of increased scrutiny around the sector. The Bank of England last year warned about risk in private credit and earlier this year warned about how banks were exposed to the private capital industry.
Ranger said the partnership would not shift Lloyds’ risk tolerance. “We’re not looking to go off and break new ground in terms of our risk appetite or our or our approach to those clients,” he said.
Earlier this year, Lloyds cut jobs in its risk management function after its management found that the unit was a “blocker to our strategic transformation”.
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