The largest German lender, Deutsche Bank, has entered into a relationship with its asset managing branch DWS, in a bid to bolster their position within the growing private credit landscape. Under the tie-up, DWS will get first access to private credit deals that are originated by Deutsche Bank, which is keen to profit from a burgeoning appetite for alternative investments. The agreement, announced on Tuesday, is a strategic move by both organizations as they seek to re-establish themselves in an open-ended market.
Strengthened Originations Capabilities for DWS
Under the terms of the agreement, Deutsche Bank will offer DWS a “first look” at a range of private credit investments, such as asset-based finance, direct lending and other asset classes related to the strategy. With this privilege, DWS will be able to offer its clients exclusive access to investment opportunities that only Deutsche Bank’s origination channels can provide. DWS CEO Stefan Hoops cited the strategic importance of the collaboration: “Private Credit is the most significant asset class for our clients looking to invest in the real-economy. Origination is the primary key differentiator for Alternative Asset Managers, especially for asset-based finance which requires entirely different origination networks to direct lending.” We expect delivery of unique deal flow to significantly enhance DWS’ capacity for offering differentiated investment solutions to clients.
This structure is particularly relevant given that asset-based finance typically requires more specialised (originations) channels which are quite different to those used for more traditional direct lending. DWS to build a vibrant pipeline with high quality private credit deals backed by Deutsche Bank’s global network and origination capability.
Moving on with a strategic response to the changing landscape of the market
Much growth has come in the private credit markets in recent years, in which non-bank lenders like Apollo, KKR, and even Blackstone, have grown to capture a huge part of the market. These actors, which operate under a much less stringent regulatory framework than that of traditional banking institutions, have taken advantage of the surging demand for non-traditional finance that is being reported. The space is evolving and traditional banks are trying to stay relevant and monetize this fee-generating asset class by forming strategic alliances with private credit managers.
Deutsche Bank’s decision to follow DWS in line with the message has echoes of the strategy adopted by some of the major houses in finance. Citi, for example, said last year that it was teaming up with Apollo, scratching the former’s backscratching and removing the capital risk. These partnerships allow banks to maintain a strong presence in the private credit market without a significant investment of capital reserves.
An increase in investor appetite for alternative asset classes like private credit is proving lucrative for asset managers like DWS. This partnership enables DWS to expand its product range and respond to increasing demand for alternative investment strategies, thereby enhancing its fee-based income streams.
DWS | Leadership & Expansion
DWS also announced the appointment of Patrick Connors (the European head of global credit financing and solutions at Deutsche Bank) as the global head of private credit in connection with the strategic partnership. This appointment is emblematic of DWS’s plan to expand its properties in the private credit arena and leverage experienced professionals to generate growth across the space.
DWS has €1 trillion in total assets under management, €110 billion of which are in alternative assets. Especially with the 150 years of history of investment with Deutsche Bank and the recent appointment of Patrick Connors we will also strengthen DWS’s position as an investment management firm.
Regulatory issues and risk management
The rapid expansion of the private credit market has prompted worries by regulators over the increased lending in the “shadow banking” world, where it operates under less regulatory scrutiny and comprehensive. Some regulators worry that the industry’s expansion could pose a systemic risk.
In addition, the expanding into asset-based financing and other specialty lending by many private credit lenders means new risk considerations. Moody’s, in a report published last year, also highlighted risks posed by diversification of international operations, saying they require robust risk management frameworks.
What Deutsche Bank and DWS will call successful private credit lending — you are not concerned about. They both have to adhere to the relevant regulations and have due diligence processes in place to manage credit risk well. The move into private credit also comes at a time of volatility in traditional markets, with the Dow down 0.6% and the S&P 500 down more than 1%.
