By Telis Demos
It may be no surprise that people are eager to put off paying in full for their holiday shopping. But who would want to fund that? Increasingly, there is an answer: private credit.
Buy now, pay later provider Affirm last week announced a $4 billion commitment for lending from investment firm Sixth Street. Because loans used to pay for individual purchases are relatively short term, and thus turn over quickly, that sum can fund more than $20 billion worth of Affirm volume over the next three years.
So while the structure of the deal might be complex, it is a straightforward illustration of how both of these businesses are evolving, and are likely to continue to move ahead in 2025.
For private credit, what might look like a market niche will continue to bleed into the wider world of banking. Via what is termed asset-based finance, private-credit managers are increasingly in the mainstream of the kinds of lending that banks or the securitization markets have long dominated. Those managers can be backed by the money of big institutions such as sovereign-wealth funds or pension funds, pools of insurance money or even the retirements of individuals. Sixth Street itself earlier this year led a consortium to acquire GreenSky, another consumer lending business, from Goldman Sachs.
That means that alternative asset managers, many of which had big stock gains in 2024, may still have runway in front of them as the list of things they can fund through private-credit funds grows. Managers such as Apollo Global Management, KKR & Co., Blue Owl and Ares Management have seen soaring share prices. KKR, which joined the S&P 500 this year, is so far the top-performing financial sector stock in the index in 2024, up over 80%.
Meanwhile, for buy now, pay later and consumer lenders, it shows how the challenge of high interest rates can be met. A key step is to secure longer-term commitments -- a hallmark of private credit -- as part of a diversified mix of incoming money. Overall, Affirm's funding capacity for lending has grown to $16.8 billion as of the quarter ending in September, up from around $13 billion the prior year and $11 billion two years ago. Affirm shares are up more than 40% so far this year.
More revenue can also negate higher funding costs. Affirm might face a higher hurdle rate from investors in a world of still-relatively-high-for-longer interest rates. But being able to transmit enough of that to merchants who pay fees, or borrowers who pay interest, while managing lending losses, can still produce the kind of credit that firms such as Sixth Street find attractive.
Whether that translates into a big year in 2025 for buy now, pay later still depends on plenty of macroeconomic unknowns. Consumers' debt appetite and ability to borrow plays a role, though with smaller, shorter-term loans it is less of an issue than it might be with credit cards, mortgages or personal loans.
Then the question is how much are people spending in general, or how much of the market goes to other payment types, such as a digital wallet or credit card that gives them some kind of reward for spending with them. And are merchants still willing to pay up to convert more shoppers into buyers with financing offers?
Growth is by no means assured, but the buy now, pay later phenomenon isn't going away.
Write to Telis Demos at Telis.Demos@wsj.com
(END) Dow Jones Newswires
December 18, 2024 06:00 ET (11:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments