One of Brigade Capital Management’s best deals in 2021 was to grant roughly one million loans to US buyers.

The investment firm has achieved double-digit returns funding more than $ 500 million in “buy now, pay later” loans and other consumer loans used for purchases on digital marketplaces like Amazon.com Inc., said people familiar with the business.

Brigade’s foray into consumer credit is part of a boom in private credit – lending by fund managers rather than banks – that is spreading across the world. The funds that make such loans now control about $ 1.2 trillion, nearly double the capital they had five years ago, according to analytics firm Preqin.

In the past, many of them provided loans to private equity firms taking over mid-sized businesses. Now they are using their cash reserves to expand in markets once dominated by Wall Street banks, such as consumer credit, mortgages and asset lending. Pension systems, insurers and endowments are diverting billions of dollars to high yield funds because the returns on conventional fixed income securities have been anemic for years.

“We believe this market overshadows the alternatives market,” Apollo Global Management Inc.

CEO Marc Rowan said at the company’s investor day in October. The figure could reach $ 40 trillion, he said. Apollo manages around $ 340 billion in credit investments, mostly private.

Some see a risk where Mr. Rowan spies on an opportunity.

“The economy is increasingly exposed to the governance and risk management of these asset managers.


– Moody’s Investor Service

According to Moody’s Investors Service, private lending is opaque, lightly regulated, prone to conflicts of interest, and concentrated among a small number of large fund managers. This presents risks to the financial system. “The economy is increasingly exposed to the governance and risk management of these asset managers,” the rating company said in a recent report.

Money spent on private debt is expected to reach $ 2.690 billion by the end of 2026, according to Preqin research, making it the fastest growing industry according to the company’s metrics. Many funds also borrow money from banks to make more loans, thereby increasing lending capacity.

The flow of money has reached unexpected places. Yield-hungry investors like pension funds – who expect low future returns on traditional stocks and bonds after the pandemic crisis – are paying fund managers to travel the world in search of borrowers who traditionally depended on banks, venturing into everything from aircraft rentals to sports franchises.

Shopping for purchase loans

New York-based Brigade has around $ 30 billion under management, investing mostly in bad rated corporate debt since its inception in 2006. Much of its recent growth, however, has come from funds that buy public securitizations: bonds loan-backed.

The company had been buying online purchase loan-backed bonds for several years when it contacted digital finance service Affirm to purchase wholesale loans privately. Affirm began providing Brigade with high yield debt in early 2021.

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Loans averaged $ 500 to $ 700 each, for purchases from brands such as Apple Inc.

and Priceline.com by borrowers with FICO scores of around 700, said people familiar with the trades.

Interest rates on loans are much higher than those on bonds Affirm sells in the public market and Brigade is increasing yields by using borrowed money for some of the purchases, the people said. Overall yields were well over 20% last year, one of the people said.

Brigade became comfortable with trading because she has studied the performance of Affirm loans bundled into bonds for years and because most loans mature in about six months, people said. Consumer loan-backed bonds paid dividends in 2020 when borrowers used government stimulus payments to fund their savings and pay off debts.

Money for Kardashian

Entrepreneur Vlad Coric recruited celebrity Khloé Kardashian to be the spokesperson for his company’s new migraine drug, Nurtec, in 2020 – all he had to do was find the money to pay it.

Selling more shares of Biohaven Pharmaceuticals Holding Co. to fund Ms Kardashian’s fees and other expenses would have hurt his shares and banks would not lend to the startup at affordable rates, he said.

Khloé Kardashian has become a spokesperson for Biohaven’s new migraine drug Nurtec, for which she was paid with a loan from alternative asset manager Sixth Street Partners.


Photo:

Terence Patrick / CBS / Getty Images

“At this point, we had used all of our resources to get the drug approved,” Coric said. “The level of spending on our direct-to-consumer marketing and social media is very high, and you need to be able to do it. “

Biohaven’s biggest competitor in migraine treatment is AbbVie Inc.

, which has a market capitalization roughly 29 times that of Biohaven.

Kishen Mehta, a healthcare equity investor and advisor to Mr Coric, introduced him to Sixth Street Partners, a $ 60 billion San Francisco-based alternative asset manager with growing private debt business. The company’s healthcare team loaned Biohaven $ 500 million in 2020 – a small portion to pay Ms. Kardashian’s fees – and an additional $ 250 million in September as her battle with AbbVie escalated.

The loans charge an interest rate of around 10%, but they gave Biohaven time to boost sales and grow. make an alliance this month with pharmaceutical giant Pfizer Inc.

Ready to take off

Delta airlines Inc.

The Airbus A220 operating between Dallas and Minneapolis this week is one of 324 aircraft in which Castlelake LP is currently investing through loans and leases with global airlines. The 109-passenger plane played a small role in Delta’s fight to overcome the pandemic.

Minneapolis-based Castlelake bought the plane from Delta during the travel industry panic in 2020 as part of a deal that allows Delta to keep the plane in exchange for regular lease payments, somewhat as a loan. The company, which also buys mortgages and consumer loans, has been financing aircraft for 16 years, but its aircraft loans have grown significantly in recent years as banks have shrunk.

Castlelake purchased an Airbus A220 from Delta Air Lines in 2020, one of 324 aircraft the company is currently investing in through loans and leases with global airlines.


Photo:

Nicolas Economou / NurPhoto / ZUMA Press

“The banks shot their horns and stopped lending,” said Evan Carruthers, Castlelake’s chief investment officer. Castlelake has invested around $ 7 billion in aircraft contracts since the start of the pandemic, a third of its $ 21 billion in assets under management, he said.

Castlelake clients love investments because they guarantee long-term income streams – aircraft leases can last up to 25 years – and they pay around 10%, after factoring in the use of the money. borrowed to increase yields, Carruthers said.

Mark under

Ares Management Corp.

is one of the largest private debt investment firms in the world and is growing at breakneck speed. The company raised about $ 36 billion for direct lending funds in the 12 months ended September 30, bringing the total assets under management in the strategy to $ 126 billion.

Ares invests the money in real estate, business loans, infrastructure projects and other niche markets, like sports franchises.

Ares Management recently loaned hundreds of millions of dollars to sports franchises, most notably to Rugby Australia in May. The Australian Wallabies faced France in July in Melbourne, Australia.


Photo:

Speed ​​Media / Zuma Press

“We’ve been investing in sports credit for a long time, but we’ve become more organized over the past two or three years and our dedicated effort is leading to scale,” said Jim Miller, co-head of direct loans in the United States at Ares.

The firm recently loaned hundreds of millions of dollars to the San Diego Padres, the Ottawa Senators, a mixed martial arts league and, in May, Rugby Australia. More than a year after the start of the global pandemic, Australia’s national rugby organization had cut staff and expenses to the bone and was looking for money.

Management was looking to sell a stake to private equity investors, but needed something “fast and flexible,” Chairman Hamish McLennan said. “What Ares has provided us with is time to get our house in order.”

The Los Angeles-based fund manager has granted a loan of AU $ 40 million, equivalent to approximately $ 29.1 million, to Rugby Australia with an option for the borrower to defer part of the interest payments if necessary.

Write to Matt Wirz at matthieu.wirz@wsj.com

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