Private credit outfits have dramatically ramped up their exposure to consumer debt, with holdings surging by $150 billion since 2019. This substantial increase reflects a strategic pivot by these firms toward high-yield investments, as detailed in a recent report by The Wall Street Journal (WSJ), cited by PYMNTS.com.
The report indicates that private credit funds held an estimated $350 billion in consumer loan balances last year, a significant jump from less than $200 billion in 2019. This expansion comes as traditional areas of private credit, such as loans made to software companies, have encountered difficulties, prompting investors to reallocate capital.
Bilt’s Pivotal Shift to Private Credit
A prominent example of this trend is the rent rewards FinTech Bilt. After Wells Fargo informed Bilt it would cease to serve as the lender for its credit card, the company struggled to secure a new partnership with a large bank. Consequently, Bilt turned to private credit for its financing needs.
In February, Bilt finalized an agreement to transfer approximately $1.2 billion of credit card balances. This funding was arranged by a consortium including Blue Owl Capital, Stone Point Capital, and Goldman Sachs, according to sources familiar with the deal who spoke to the WSJ. Furthermore, these companies committed to financing hundreds of millions of dollars in future credit card balances that Bilt customers are expected to incur. When reached for comment by PYMNTS, Bilt declined to discuss the WSJ report, instead referencing its earlier announcement regarding the launch of Bilt Card 2.0 in collaboration with Cardless.
Fueling FinTech Growth and Investment Mechanisms
The WSJ report highlights that private credit is increasingly fueling a range of companies, particularly FinTechs, enabling them to generate a growing volume of loans. Blue Owl Capital, for instance, has demonstrated significant commitment to the FinTech sector. This includes a $2 billion agreement to acquire consumer loans from Upstart and a $5 billion commitment to support SoFi’s personal loan platform, as previously covered by PYMNTS.com.
The expansion of private credit into consumer debt encompasses a mix of investment strategies. It involves the acquisition of previously originated loans that traditional lenders offload to private credit firms. Increasingly, it also includes “forward-flow arrangements,” which are agreements to purchase loans that have yet to be originated, providing a steady pipeline of new debt assets.
Divergent Views on Risk Assessment
The move into consumer debt is not without its complexities, and private credit executives hold differing views on its inherent risks. Some executives perceive consumer debt as less risky, citing the relatively low delinquency rates observed on credit cards. This perspective suggests a degree of stability in this asset class.
However, other private credit companies remain skeptical, particularly concerning consumers who do not hold mortgages. These firms point to several macroeconomic factors that could heighten risk, including persistent inflation, slowing wage growth, and a cooling job market. Such conditions, they argue, could make it progressively more challenging for consumers to meet their debt obligations.
Evolving Consumer Behavior
This shift in private credit investment coincides with evolving consumer financial behavior. PYMNTS.com earlier reported a slowdown in the revolving credit space, following a period last year where revolving balances grew more rapidly than other forms of borrowing. Recent data from the Federal Reserve suggests that individuals are curtailing their reliance on credit cards, even as these instruments remain essential for daily spending.
This behavior aligns with PYMNTS Intelligence, which indicates that more than half of consumers primarily use credit for planned purchases, while also maintaining access to credit as a contingency for unforeseen expenses. The confluence of private credit’s aggressive pursuit of consumer debt and a more cautious consumer landscape sets the stage for a dynamic period in the financial markets.
