GPs poised to take 8-11pc in credit revenue from banks
Fund managers are set to take between eight and 11 per cent in credit revenue away from wholesale banks, as the private credit sector reaches an inflection point.
A new analysis by Oliver Wyman found that a “dramatic shift” has been happening in the credit markets, with structural changes taking place across both liquid and private credit markets, driven by the rise of non-bank players, changing investor appetite, and an evolving regulatory backdrop
Oliver Wyman expects this trend to continue, and predicted that there is still an incremental $35bn (£27.67bn) to $50bn of existing revenues potentially at risk for wholesale banks.
Read more: Private credit yields reach 10-year high
The report, titled “Extending Credit: The Evolving Role of Wholesale Banks In Credit Markets”, was co-authored by Morgan Stanley. It explored the transformation of the wholesale banking business model, with private credit managers now competing with banks for credit deals.
As banks face increased regulatory pressure, these alternative managers have an opportunity to take and even bigger share of the credit markets.
“The emergence of liquid trading channels in credit markets over the past five years has been surprising and somewhat overshadowed by the high-profile growth of private credit,” said the report.
Read more: Private markets become ‘a mainstay’ of insurance portfolios
“Waves of innovation, including electronification of credit trading, growth in satellite credit markets, data and pricing transparency, and trading automation, are generating opportunities for banks to serve a more diverse set of market participants — and generating new sources of competition for market making in these products.
“The electronification of liquid credit markets, supported by the growth of credit exchange-traded-funds as a source of liquidity, a rise in portfolio trading, and evolving trading protocols, has opened the door to non-bank market makers.”
The report added that as liquid credit market structures and dynamics start to resemble parts of equities and macro, value capture and market share is shifting toward these non-bank players. Oliver Wyman believes that as the market matures, a similar model could emerge in liquid credit.
Read more: Why yield compression is creating new opportunities in private credit
