Covenant Lite #6: Growing Trend of Bank / Private Credit Partnerships
Officially cuffing season in lending land
Welcome back to Covenant Lite! For today’s post, I want to focus on the trend of tie-ups between banks and private credit firms. This is something that my friend, Nick, over at Credit Crunch has been tracking with regular updates in his weekly substack and one which promises to have a big effect on the private credit landscape in the years to come.
For years, banks have looked with jealous eyes at the growth of private credit — growth that has come largely at the expense of their own origination activities. Forced by regulators to rein in their corporate lending practices, banks have found a number of their largest clients increasingly opting for a private credit solution rather than a bank solution when looking to do an M&A deal or to finance the purchase of new equipment.
This is not ideal for banks since it means fewer opportunities to profitably deploy their capital. Perhaps more significantly, however, it also makes them less important to these clients — since they can no longer be a one-stop financing solution to these groups — something that made these relationships so sticky.
But unlike a jilted lover who passively curses his or her fate, banks are starting to take action. They’re working on themselves: losing a few pounds, trying a new haircut, taking improv classes…jk. To complete the analogy, they have suggested to their partners that rather than breaking up they enter into one of the more modern of relationship arrangements — the “throuple” — a shared relationship between the client and their bank / private credit partners, with each bringing something slightly different to the table.
Generally, the bank plays the role of arranger, guiding the borrower through the process, maybe providing the senior piece of debt (which is most capital efficient) and then having the private credit partner provide the junior capital. This way, the bank is able to enhance its relationships with existing clients, who may have been flirting with private credit options. The momentum appears to be growing, with many of the biggest US and European banks announcing splashy deals in the last few months with blue-chip private credit players like Apollo, Centerbridge and Oaktree.
But, why is this happening? What do the banks and their private credit partners get out of these partnerships? And what does this likely mean for the future of private credit? Read on to find out!
The Beginnings of a Trend
First, I thought it would be helpful to provide a graph showing the notable partnerships announced in the last 3 years:
As you can see, KeyBank and Beach Point Capital were the early trendsetters when it comes to these tie-ups. The relationship was structured as a joint venture where KeyBank would originate loans using its middle market client base and provide senior capital, while Beach Point would contribute junior capital (which is very expensive for a bank to hold on balance sheet). This provided a win-win-win for each member in the arrangement since the client got a one-stop solution for senior and junior capital, the bank was able to retain / enhance their relationship with the client and the private credit partner was able to get a new origination relationship for its junior lending business.
Since then, others have seen the benefits of such a structure and created their own. In the last ~1.5 years, by my count, there have been 16 other such relationships consummated. Each with its own set of origination focuses and roles / responsibilities borne by the bank and private credit partner.
High-Level Categories of Partnerships
These bank–private credit partnerships can be grouped into a few broad categories based on their primary focus and market segment:
Middle-Market Sponsor Direct Lending JVs: These are partnerships aimed at sub-investment-grade, cash-flow loans to sponsor-backed middle-market companies (often unitranche or leveraged loans). This category is the most popular and includes Stifel & Lord Abbett (SBLA Private Credit), KeyBank & Beach Point, Lloyds & Oaktree, Raymond James & Eldridge, Webster Bank & Marathon, and Stifel & Benefit Street/Diameter. Each of these tie-ups combines a bank’s origination network among mid-sized sponsor-backed companies with a private credit firm’s capital:
Examples: KeyBank–Beach Point (middle-market unitranche loans up to $1.5B program), Lloyds–Oaktree (one-stop senior debt for UK mid-market buyouts, ~£175M hold per deal) (Lloyds Bank and Oaktree Partner to Launch a New Direct Lending Facility | Business Wire), Stifel–Lord Abbett (leveraged loans for small/mid PE portfolio companies), Webster–Marathon (senior loans for sponsor-backed firms, combining bank & fund expertise) ( Marathon Asset Management and Webster Bank Form Private Credit Joint Venture - News | ABL Advisor ). All serve the leveraged loan / direct lending space, providing sponsor clients a single source of financing (often blending senior and junior capital) with greater hold sizes and certainty of execution than a traditional syndicated bank loan (Lloyds Bank and Oaktree Partner to Launch a New Direct Lending Facility | Business Wire) ( Marathon Asset Management and Webster Bank Form Private Credit Joint Venture - News | ABL Advisor ).
Investment-Grade & Asset-Backed Lending Partnerships: Focus on high-quality, asset-backed loans or investment-grade credit. For example, Apollo & BNP Paribas target investment-grade, asset-backed credit (warehoused loans and securitizations). Citi & LuminArx (Cinergy) also plan to invest across asset-backed categories (commercial, consumer, residential) and other debt, including higher-quality tranches. These partnerships often involve banks providing financing or balance sheet support for relatively safer assets, leveraging the bank’s low funding costs and the asset manager’s structuring/origination.
Specialty or Non-Sponsor Lending Partnerships: These are partnerships targeting niches outside the typical PE middle-market buyout loan. For instance, Piper Sandler & BC Partners Credit formed an alliance to finance regional banks and non-bank financial firms, effectively providing regulatory capital or growth capital to banks via private credit. This is non-sponsor lending, focused on financial institutions rather than PE-backed companies. Another example is Apollo’s earlier collaboration with BNP via the Eliant platform for inventory finance (mentioned in Apollo–BNP release), which targets asset-based finance for inventories – again a specialized lending niche.
For more detail on each partnership, I’ve included a table with all of the underlying partnerships sorted by announcement date:
Why Banks Are Partnering with Private Credit
As discussed above, banks are increasingly teaming up with private credit managers in response to market and regulatory forces. Heightened banking regulations (post-Global Financial Crisis and Basel III/IV) have constrained banks’ ability to hold riskier loans on balance sheet. By partnering with less-regulated private lenders, banks can still serve clients’ credit needs (including riskier or highly leveraged loans) without violating capital requirements.
For example, Citigroup noted that regulation prompted it to reevaluate lending and join with LuminArx for a private debt vehicle. These JVs give banks “extra financial firepower and flexibility” by tapping into partners’ capital (Raymond James partners with Todd Boehly's investment firm for private credit push | Reuters). They also allow banks to retain client relationships – e.g. a corporate or sponsor client can get a large loan underwritten via the bank–credit fund partnership (one-stop), instead of the bank losing the deal to a direct lender.
Another driver is the booming private credit market, now an ~$1.5–1.7 trillion asset class. Banks see an opportunity to “grab a slice” of this growth by aligning with alternative asset managers. Rather than compete directly against private credit, banks are choosing to join them. It’s a mutually beneficial setup: banks contribute deal flow, underwriting, and sometimes a senior capital piece, while private credit firms bring billions in capital (and appetite for junior or riskier tranches) that banks can no longer comfortably hold.
Longer Term Impact and Implications
This wave of bank–private lender alliances is intensifying competition in direct lending. With major banks now entering the space via partnerships, private credit managers face more competitors chasing deals – including partnerships backed by deep-pocketed banks. More capital and more lenders vying for transactions typically leads to yield compression (lower returns) and more borrower-friendly terms.
For banks, partnering with private credit funds is a way to stay relevant in leveraged finance and earn fees, even as direct lenders encroach on traditional syndicated lending. It allows banks to use their origination networks and relationships while offloading some credit risk to hungry private investors. It also helps banks address clients’ needs for larger loans quickly – for instance, Lloyds and Oaktree can commit £175M together to a deal, providing certainty and speed that a multi-bank syndicate might lack (Lloyds Bank and Oaktree Partner to Launch a New Direct Lending Facility | Business Wire).
For private credit firms, these partnerships provide access to deal flow they might not get otherwise. Banks have long-standing corporate and sponsor clients and see a wide array of financing opportunities. By aligning with banks, credit funds can deploy capital at scale more readily. They may also gain credibility and infrastructure (e.g., loan servicing, agency functions, cross-selling of bank products) through the bank affiliation.
From a market perspective, the trend blurs the line between traditional banking and non-bank lending. It suggests a future where large financings – especially in the middle market – are often done by hybrid teams of banks plus private capital. This could lead to a more efficient but also more competitive lending environment. Borrowers benefit from one-stop solutions and ample liquidity, but private credit returns could be squeezed as competition heats up and more partnerships target similar high-quality loans. There is also a risk that if every bank starts a similar program, the unique edge of private credit (bespoke, high-yield deals) diminishes, and loans start to resemble commoditized products.