As Wall Street Chokes on Bad Buyout Loans, Rivals Seize Opening

For the titans of private credit, it’s a once-in-a-generation opportunity.

Wall Street’s vaunted leveraged finance desks are reeling. Billions of dollars in losses on mistimed loans have forced them to dramatically scale back lending, leaving the private equity firms that rely on them to help fund acquisitions in a bind.

Enter the likes of Apollo Global Management Inc., Blackstone Inc., HPS Investment Partners and Ares Capital Corp. Direct lenders, already among the largest players in leveraged buyout financing, see an extraordinary opening to grab market share — and hang onto it for the long haul.

Their strategy, in part, involves staking a claim to increasingly larger loans, deals once exclusively the domain of banks due to their sheer size. The four are among the shops offering $5.5 billion to fund Carlyle Group Inc.’s purchase of a 50% stake in Cotiviti Inc., according to people familiar with the matter, in what would be the biggest ever transaction of its kind. Private credit firms are also working on a $5 billion financing for another LBO, said the people, asking not to be named because they’re not authorized to speak publicly.

The bold foray speaks to the power shift already underway in the lucrative business of providing debt to the buyout industry. Should the strategy succeed, Wall Street risks losing out on even more fee-rich financings that until recently generated a third of their investment-banking revenue. What’s worse, the more reliant private equity becomes on direct lenders, the harder it will be for banks to win back mandates, market watchers say.