HSBC: Private Credit Has 'Fundamentally Changed' Credit Markets

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00:00Before we delve into private credits, I just want to zoom out for a little bit

00:03and talk about the sheer number of news headlines that we've had this year,

00:08and yet a remarkable outperformance for global equities.

00:12It actually has been a very strong year for U.S. equities, European equities, Asian equities as well.

00:17How has that translated into your business?

00:21Well, one of the things that you see is when you talk about the performance of the equity markets

00:25feeding into banking activity, there's almost always an increase in M&A incentive

00:31for companies that have market caps that have grown over the course of the year.

00:35People who are at the helm of large public companies see those currencies as rising in value

00:41and therefore will look to make acquisitions on the back of that.

00:44We're certainly seeing an uptick in our M&A financing pipeline.

00:49And the credit markets are highly accommodating at this point for most acquisitions.

00:55That are of high quality, where there's a clear strategic rationale and a financeable business.

01:03And in the introduction out to you, I was talking about the huge growth that we've seen in private credits.

01:08How is HSBC capitalizing on that?

01:11And what edge do you have in what's becoming a very competitive market?

01:17Sure. Well, look, private credit has fundamentally changed the structure of credit markets.

01:23And this has happened over the course of the past decade, but with increasing speed over just the last few years.

01:30We have since, call it 2015, seen the size of the private credit markets quadruple

01:36from roughly, let's call it $450 billion to around $1.7 trillion today.

01:44It's still a relatively small proportion of the aggregate credit outstanding, particularly around corporates,

01:49but it is increasingly a very relevant source of capital for companies, small and large.

01:55In fact, the biggest area of growth that we see right now in private credit is around investment-grade companies

02:01as opposed to small and mid-sized companies, which is really where the market began.

02:07Yeah. You know, just as you were speaking, I'm not sure if you saw, but we put up a screen

02:11talking about some of the little credit cracks that are beginning to emerge.

02:16You know, there was the regional bank exposure about a month ago,

02:19Blue Owl scrapping their plans to merge public and private credit funds.

02:24Given how much spreads in this space have compressed,

02:28are investors getting adequately compensated for the risks that they're underwriting?

02:34Yeah, look, I think that one of the biggest risks in private credit

02:37is really just around the persistence of returns.

02:40I think the kind of high-profile blow-ups that you've highlighted

02:44are really the sorts of things at the fundamental credit level

02:47that happen when you get into a situation where you have very rapid growth in a market,

02:52as we have here, a real sort of competitive situation on the part of lenders to deploy capital.

02:58And what that creates is sometimes a rush for deals.

03:01And what that means when we look at these situations in hindsight,

03:05we see oftentimes at the deal level, you see kind of breakdowns in due diligence,

03:09breakdowns in transaction structuring, breakdowns in transaction controls

03:14that we would consider to be the sorts of things that, as a regulated bank institution,

03:20we would consider par for the course, but some with more flexibility

03:23maybe are free to pursue alternative methods.

03:27Now, the fundamental point, though, Jumana, is that just because something is private credit

03:31does not make it more risky.

03:33This market is populated by, you know, there's a handful to a dozen names

03:38who have been in this business for over 20 or 25 years.

03:42The business itself has existed since the 90s.

03:45And the recent growth has brought in a lot of additional capital

03:49and a lot of additional platforms who had not historically been trafficking in the space.

03:54And that's where you start to see a little bit more of the pressure to deploy.

03:58Yeah, Jerry, you know, people often forget that 99% of the market in Europe is comprised of SMEs.

04:07Would you say it is therefore incumbent on investors to participate more in this space

04:13for Europe's ultimate competitiveness in the long run?

04:17So I would agree with that.

04:18And I think to think about why private credit became the force that it has,

04:22this was initially almost a creation of a regulatory construct that pushed a lot of lending out of banks

04:28that kind of caused banks to need to reconsider lending into small and medium-sized enterprises

04:35and lending into longer-day exposures.

04:39HSBC, for its part, we're essentially the largest mid-market bank in the world.

04:43We have the client base that private credit funds would like to have access to.

04:48And so we're very much active in lending tests and ease, particularly around our innovation banking proposition.

04:55Yeah.

04:56Jerry, I'm going to round up asking you a question.

04:58There was a major restructuring that was announced at HSBC on the macro side of the business,

05:03a streamlining of credits and macro.

05:05Can we expect something similar, a restructuring of a similar magnitude in your line as well?

05:12Look, I think all the changes that have happened over the course of the year

05:15have been sort of led from the top with George El-Hedry trying to cause HSBC to become a simple organization

05:22and one that's straightforward and easy for our clients to manage and navigate

05:27and where kind of the personnel and the assets and the funding of the business are very closely aligned to strategy.

05:34I think last week's announcement were another example of that.

05:38So we'll carry on.

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