(Bloomberg) -- Citigroup Inc. and Apollo Global Management Inc. are teaming up in the fast-growing private credit market, agreeing to work together on $25 billion worth of deals over the next five years.
The two Wall Street heavyweights have struck an exclusive partnership to arrange financings for corporate and private equity clients, according to a statement seen by Bloomberg. Mubadala Investment Co. and Apollo’s insurance unit Athene will also participate in the venture, which will initially focus on North America.
“This is where the industry is going,” Apollo Co-President Jim Zelter said in an interview, describing the relationship between private capital providers and banks. “Citi goes from a very active M&A banker with a few tools to having the complete toolbox.”
Citigroup and Apollo have the option to expand the arrangement, which only covers non-investment grade lending, beyond the initial $25 billion goal and to broaden its scope to include additional regions. The program aims to originate $5 billion of debt deals in its first year, according to Zelter.
The two firms have set one of the most ambitious targets to date in a string of tie-ups between banks and private credit managers that is reshaping Wall Street and capital markets alike.
Citigroup shares were up 1.82% at 10:45 a.m. in New York. Apollo shares rose 0.38%.
Long seen as rivals in providing financing to companies, the two industries have increasingly converged. Banks are looking for ways to maintain their fee streams without tying up their own balance sheets as they grapple with regulation and capital requirements. Private credit managers, meanwhile, are under pressure to find new avenues to source investments after raising record amounts of cash.
Read More: Banks Pump Billions More Into Private Credit as Frenzy Grows
Citigroup will rely on its investment banking expertise to source new debt deals among its clients and will earn a fee for originating the transactions. Apollo and its partners will provide the cash. The offering will become a third prong in the bank’s debt capital markets strategy, complementing its existing business of arranging loans and bonds for distribution in the public markets.
“We lose a number of transactions to private credit,” Richard Zogheb, Citigroup’s head of debt capital markets, said in an interview. “The great news for us now is that we can maintain incumbency and offer that solution.”
Citigroup is following rivals in making a bigger push into the $1.7 trillion private credit industry — though each bank has taken a different approach. JPMorgan Chase & Co. has set aside at least $10 billion of its own balance sheet for direct lending. Goldman Sachs Group Inc. has for years raised third-party capital through its asset management unit for privately originated deals. Wells Fargo & Co. last year teamed up with Centerbridge Partners to launch a $5 billion fund.
Close Ties
The deal between Citigroup and Apollo brings closer together two firms that have long been intertwined on Wall Street. Zelter joined Apollo in 2006 after more than a decade at Citigroup, where he had once served as the chief investment officer of a division that invested in private assets. Before that, he oversaw the bank’s global high-yield and leveraged finance business. Citigroup is a frequent underwriter of debt deals for Apollo’s private equity business.
Citigroup’s Vis Raghavan, who joined this year to oversee all of the bank’s dealmakers after leading the global investment banking franchise at JPMorgan, is working to turn around performance at his division. The firm has jumped to become the No. 2 underwriter on investment-grade bonds in the US this year, behind JPMorgan, according to data compiled by Bloomberg. It has slipped in performance on high-yield bonds and leveraged loans, however.
Apollo is one of the largest private capital providers, with nearly $700 billion of assets under management at the end of the second quarter. Of that, more than $500 billion is tied to its credit businesses.
Chief Executive Officer Marc Rowan has targeted a universe of more than $40 trillion worth of investable private credit assets, which includes lending to private equity deals and large corporations — as well as financing for a broad range of asset classes from mortgages to music royalties.
