The recent announcement of Citigroup and Apollo Global Management teaming up to explore the private credit market is a significant development. Their plan to work on $25 billion worth of deals over the next five years highlights a growing trend in finance. This partnership is not just about the money; it reflects a shift in how investors are thinking about credit.
To understand this shift, it’s essential to grasp the difference between private and public credit. Public credit, which includes bonds and other securities traded on exchanges, offers liquidity. Investors can buy and sell these assets relatively easily, which is a big draw. However, this liquidity comes with a downside: price volatility. When markets react to economic news or shifts in sentiment, the prices of public credit instruments can swing dramatically. For investors who must mark their assets to market, this volatility can lead to uncomfortable drawdowns, impacting their overall portfolio performance.
On the other hand, private credit is becoming increasingly appealing. It typically involves loans made directly to companies or projects, often through private funds. This structure allows investors to focus on the income generated by these loans rather than worrying about how the debt is priced in the market. During periods of economic uncertainty, like the volatility seen in 2020 and 2022, this stability becomes even more attractive. Investors can prioritize reliable income streams without the noise of daily market fluctuations.
Apollo Co-President Jim Zelter’s comments about the partnership highlight this sentiment perfectly. He notes that the collaboration gives Citigroup a “complete toolbox” for working with private capital. This toolbox is crucial in an environment where traditional banking models are evolving. Investors are looking for ways to mitigate risks while still achieving solid returns, and private credit fits the bill.
The recent history of market volatility has made many investors rethink their strategies. The massive swings in asset prices during the pandemic and subsequent economic shifts have left some feeling uneasy about relying solely on public credit. In contrast, private credit offers a way to gain exposure to fixed income without the same level of risk associated with market pricing.
As Citigroup and Apollo embark on this venture, they are tapping into a growing demand for investment options that provide more control and stability. This partnership is a reflection of a broader trend in finance, where investors are increasingly drawn to private credit as a way to navigate the complexities of today’s economic landscape. With the right strategies in place, private credit can serve as a reliable anchor in an otherwise turbulent sea of financial markets.
