As the cost of private capital is higher and there’s just less of it around, will consumers end up struggling?

Something that deserves acknowledgment is how smooth this volatility has been for consumers. In 1994, when interest rates spiked, there was a lack of credit that made the Fed cut rates by July of ’95. This year, we’ve had both bank failures and rapid interest rate increases. And now we are seeing a symbiotic relationship between banks and private credit, where lending gaps are being filled instantaneously.

From my perspective, it’s been remarkable that we haven’t had a larger contraction of credit at the consumer level. That’s probably one of the things encouraging a lot of people to change their calls to a soft landing – if credit was unavailable and with the consumer being two-thirds of the economy, we might have a different outcome. 

The volatility of the asset backed securities markets this year and last year also contributed to more companies turning to private lenders. But is the trend here to stay?

The public ABS market is a great option for originators to distribute risk and raise capital. But we are talking with companies and banks who use ABS about how to diversify their funding models. We’ve bought loans from these firms, be it consumer or other types of loans, when the securitization markets were active. 

The volatility in the ABS market last year reinforced what we’ve supported for a long time: The importance of having a diversity of funding sources such as securitization, forward flow and balance sheet. Partnering with private credit managers that can provide capital from longer-dated insurance liabilities is a great way to achieve this, where there isn’t the dynamic of demand deposits that can disappear overnight. We believe that every originator should be thinking this way.

Eoin Treacy's view

Two primary factors tend to drive a bull market in financial companies. These are new product offerings and the absence of regulation. Together, enterprising salespeople have the capacity to grow the leverage in a sector to unimaginable scale.

In the early 2000s credit derivatives were a new product and securitisation was not well understood. That allowed leverage to reach dizzying heights. It was not until the global financial crisis that the risk inherent in these structures became obvious. The focus of subsequent regulation focused on ensuring banks would not be able to take those kinds of risks again.