The history of leveraged finance can be divided into three distinct acts, each marking a significant shift in the industry. The first act was dominated by high-yield, or “junk,” bonds and was brought to an abrupt end in 1990 with the imprisonment of Michael Milken, a key figure in this type of debt. The second act saw the rise of private equity, fueled by both junk bonds and leveraged loans, which offer companies a floating rate of interest. However, it was the third act that truly reshaped the landscape of leveraged finance, as private-credit investors emerged as a dominant force in the market.
Since 2020, private credit firms, many of which also operate private-equity funds, have raised over $1 trillion. With interest rates on the rise in 2022 and banks becoming more hesitant to underwrite risky loans, private credit became the primary source of financing for many companies. This shift led to widespread speculation on Wall Street that a “golden age” of private credit had dawned.
The leveraged finance market in America now encompasses junk bonds, leveraged loans, and assets managed by private-credit firms in roughly equal measure. However, despite the industry’s apparent strength, there are growing concerns about the sustainability of private credit’s success. Fierce competition for refinancing and funding new deals has raised doubts about the industry’s long-term prospects.
Interestingly, the industry’s affinity for ancient Greece is evident in the names of some of its major players, such as Apollo and Ares. However, this nostalgia for the past does not seem to extend to the lessons of ancient Greek mythology. If fund managers were to heed the words of Hesiod, they would recognize that following a golden age often comes a descent into a grim iron age, rather than a rise to even greater heights.
As the leveraged finance industry continues to evolve, it will be crucial for players to adapt to changing market conditions and remain vigilant against emerging risks. The history of leveraged finance is a story of resilience and adaptation, and only those who are able to navigate the challenges of the present will succeed in shaping the future of the industry.