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The author is Vice Chairman of Oliver Wyman and former Head of Global Banking and Head of Diversified Financial Research at Morgan Stanley.
As we face the need for huge capital investments to bring data centres, energy and industry back to the domestic market, the unanswered question is who will finance it?
With the new Washington administration’s more lenient regulations, newly energized U.S. banks appear to be seizing the opportunity. The rise in the sector’s stock prices since the US election suggests that investors generally expect more room to deploy more profitable capital. Morgan Stanley estimates that more than $86 billion in bank capital could be freed up if the so-called Basel III global rules for banks are implemented in the U.S. in a “capital-neutral” manner, meaning there is no net increase in capital demand. We estimate that there is. Top 12 banks making loans or stock buybacks.
Nevertheless, my contention is that if large private credit providers partner with insurance companies, they could fill a growing portion of the funding needed for future investment needs.
The top seven publicly traded private credit groups currently hold $2.1 trillion in credit assets, including infrastructure and real estate debt. But traditional private credit markets are becoming increasingly crowded and are likely to become increasingly chosen by banks to fund large loans for leveraged buyouts and other transactions.
As a result, some private financial companies are moving for greener pastures. Major companies are shifting their reliance on middle-market lending and acquisition finance to become less reliant on middle-market loans and acquisition finance, and are starting to finance the huge capital investments needed for data centers, energy transitions, and other hard assets.
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More than $1 trillion will be invested in data centers in the U.S. over the next five years, with another $1 trillion expected overseas to meet the surge in demand for cloud computing and artificial intelligence applications, according to Blackstone. has been done. The energy required for all of this will require additional investment, as will the transition to greener power sources and an increase in energy demand in general.
Apollo Global CEO Mark Rowan claims there could be $15 trillion to $20 trillion in private project finance deals next year. These assets are complex, old, and require innovative financing solutions that don’t necessarily work easily with traditional banking or debt markets.
Private credit currently accounts for only about 5% of the $5.5 trillion specialized finance market, according to Oliver Wyman. And the share of energy infrastructure is even lower. However, major changes in private credit funding models are now spurring expansion.
According to our research, private credit assets funded by the top seven listed insurance companies in the private market currently account for 43% of the credit assets held by these companies, up from 32% at the end of 2021. It has been increasing since. This is a long-term source of funding. , stable capital to invest. In other words, more than half of the inflows in 2024 came from insurance companies.
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Insurance companies need investments in high-quality, long-term assets that are inflation-resistant. In fact, BlackRock’s chief financial officer Martin Small has talked about the possibility of converting 10% of its $700 billion insurance assets from core bonds to private credit. This was a key part of the rationale for BlackRock’s $12 billion acquisition of private credit group HPS. Northwestern Mutual also signed a deal with Sixth Street to manage $13 billion in assets.
This insurance capital is changing the types of projects that private credit can support. For example, insurance companies prioritize stable 7-9% returns for long-term infrastructure financing needs. In some ways, this means a return to the old funding model. After World War II, major insurance companies financed and even owned innovative infrastructure projects and public utilities.
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But think about Europe. Europe has similarly huge infrastructure needs, yet insurers are severely restricted from playing a larger role in financing the real economy through the purchase of private credit and senior tranches of securitizations. . Data center securitizations in the U.S. have totaled $24.3 billion since 2018, but this is yet the first such transaction in the EU, according to JPMorgan Chase & Co. Similarly, solar securitization in the US has raised $27 billion since 2018, while the EU raised €230 million for the first time in 2024.
As former Italian Prime Minister Mario Draghi called for, and as I argued on this page last year, rebalancing insurance, securitization and private credit rules should be a priority if Europe wants to increase infrastructure investment. .
More broadly, there are a number of risks that must be addressed when providing private credit for future investment needs, including the quality of the borrower. However, US private credit markets are likely to play an increasing role in financing the capital investment boom.
