HOWARD MARKS, OAKTREE CAPITAL

price, you don’t have time to do a bond road show over the next three months,” says Mr. Patterson. Nor do borrowers want to worry about how a distant geopolitical crisis might move the bond markets. “That’s not how private credit when done well works,” he says. “I don’t need to worry about, oh, the market just moved so I’m going to [alter the agreed interest rate] on your deal.”

Nordic Aviation Capital, a leasing company with a fleet of 500 smaller planes used on regional routes, had even bigger problems when it tried to raise debt financing five years ago.

“The banks were scared of aviation, scared of [what to them were] unknown businesses, and they were basically scared to get into fixed assets,” says chief executive Soren Overgaard. He also talked to insurance companies, which are large debt investors, and received offers from small banks that were willing to take risks, “but the pricing on that was totally insane.”

Nordic typifies the kind of borrowers that have turned to private funds: neither “normal” enough to meet standard banking requirements, nor big enough to merit attention, they can find themselves shut out of the banking system. Lenders such as HPS “don’t have the same capital requirements as a bank does [so] they’re not bound by the same regulatory framework”, says Mr. Overgaard. “I guess the banks like to put things into boxes, and if you don’t fit into a box, tough luck.”

“You can raise a lot of money if you’re a credit manager today. But then you have to put it to work. So people are competing to make loans.” Having watched returns dwindle over a decade when interest rates were close to zero and central banks vied with portfolio managers to buy bonds, pension funds and insurers have raced to commit money to what many see as a lucrative new asset class. Average annual returns for private credit funds have exceeded 5% over every five-year period since 1992, according to figures compiled by Hamilton Lane, a firm that advises public pension funds and others on investments worth more than $400 billion.

Drew Schardt, the firm’s head of credit investments, says that even bottom-quartile credit funds perform reasonably well, in contrast to private equity, where returns are heavily dependent on the manager’s pedigree.

Three of the four biggest US private equity firms now manage more money in credit funds than in their private equity arms. That is a marked turnround from decade ago, when debt funds accounted for about one-fifth of their assets. All told, private debt funds have amassed a $160 billion war chest of capital that has not yet been lent out, twice what they had a decade ago and enough to support perhaps $360 billion of business lending once bank debt is added on top.

It is a strategy that has proved especially lucrative for the handful of firms such as Blackstone, KKR and Ares Management that have listed on the stock market, because it provides a more constant flow of revenue than the traditional private equity model.

“These firms have figured out that the markets do not place much value on carried interest [the 20% share of investment profits that is traditionally paid to fund managers],” says a banker who holds talks with dozens of private equity funds every year. “Recurring management fees which you get every year is a language stock market investors understand. So you become asset gatherers. If you can grow your credit business faster than the equity side, even with lower returns [for investors], that’s highly profitable.”

Apollo Global Management has taken the idea furthest. Not content with persuading investors to put money into its credit funds, it set up an insurance company that invests its entire balance sheet with the firm. That company, Athene, has struck deals with traditional insurers such as Aviva to assume responsibility for annuity contracts. These convert the wealth amassed by a retiring worker into a promise to pay an annual sum, leaving the insurer responsible for investing