Dan Pietrzak on Why Private Credit Matters

Image by Holly Fasching

In this episode of Lehigh University’s College of Business ilLUminate podcast, we are talking with Dan Pietrzak '97 '28P, Partner and Global Head of Private Credit at KKR, a global investment company that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit, and through its strategic partners, hedge funds. 

Prior to joining KKR, Dan was a managing director and co-head of Deutsche Bank's structured finance business across the Americas and Europe. Previously, he held various roles in the credit businesses of the Societe Generale and CIBC World Markets. Dan started his career at PricewaterhouseCoopers in New York.

Pietrzak was recently back on Lehigh's campus to deliver the 2024 Donald M. Gruhn '49 Distinguished Finance Speaker Series lecture. His topic was Financial Market Evolution Post the Global Financial Crisis, and he discussed how the 2008 financial crisis has reshaped global markets.  

Before the Gruhn lecture, Pietrzak spoke with Jack Croft, host of the ilLUminate podcast, about his passion for remaining actively engaged with Lehigh and his work at KKR. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript [PDF].

Jack Croft: You met your wife, Mariela ‘97, while you were both first-year accounting majors. So how did you first meet?

Dan Pietrzak: That's probably one of my biggest successes or benefits of being at Lehigh. I mean, in some ways, it's as boring as her maiden name was Obregon, my last name is Pietrzak. A lot of the classes were done in alphabetical order. I remember being in certain either classes or labs freshman year. 

I think we ended up being fortunate that we shared a tremendous amount of the same friend group. She was active in her sorority here. Her sorority and my fraternity kind of knew each other well. A bunch of people within that friend group ended up dating or ended up getting married on the other side of Lehigh. So honestly, it's been a great story.

I mean, we had this benefit of being really good friends for a really long time. We started dating at the end of Lehigh or sort of right after Lehigh. I've been married now 24 years. So that's something that brings a smile to my face.

Croft: You and your wife have also endowed the Pietrzak Family Endowed Scholarship. And as I understand it, both of you actually had scholarships that helped make it possible for the two of you to wind up at Lehigh together. So if you could talk about what scholarships meant to both of you and why you decided that route to pass on to the next generation of students.

Pietrzak: It was both very important to Mariela and I to be able to afford to go here. We were both on fairly significant financial aid or scholarship packages. I think these endowed scholarships, it was very unique to us at the time. 

Not only the people were generous enough to donate that, but you were actually sort of assigned a person. Like you knew who had given your scholarship. They would either write a letter, or you'd meet them on an annual or semi-annual basis at some sort of scholarship dinner. It brought up a bit of a personal touch or connectivity to that. 

Because it meant so much for us to be able to go here, it definitely had a real impact on us. … We were fortunate enough for others to donate to allow us to be able to afford to go here. We wanted to kind of do the same. Honestly, that was on the bucket list early, not just because Lehigh meant a lot to us. Obviously, it's given us, in many ways, most of the things we have in sort of our personal life. But the fact of being able to provide that scholarship really meant something.

Croft: In your Gruhn Lecture this afternoon, your topic is Financial Market Evolution Post the Global Financial Crisis. And one of the specific areas you're going to be discussing is the dramatic increase in private credit over recent years. Do you see continued growth in the future? And are there any potential warning signs we should be on the outlook for?

Pietrzak: I think private credit has become an area or a sector that either has become in vogue or become pretty popular in the financial media. I've been doing credit for a long time. Probably credit's never been the cool asset class. It's been that way a little bit for the past couple of years, which has been nice to see.

I think there are a couple misnomers out there. I think there's this misnomer on one hand that private credit's new. I don't believe that to be true. You had the likes of GE or CIT or others making loans pre-financial crisis. You had BDCs (Business Development Company) pre-financial crisis. You could argue that a lot of the stuff the banks were doing, because it wasn't traded or wasn't in any kind of capital markets activity, you could argue that was private credit, right? So this is not a new thing.

The financial crisis was an extremely difficult time in financial markets globally. It was a very difficult time in the U.S. kind of generally. I think you saw a system at the time that was sort of over-levered. I think you saw a bunch of complex financial products out there. I think you saw a mortgage bubble and a housing crisis really cause a bunch of bank failures for big-name banks that we all kind of knew. 

I mean, it was more than an interesting time to be front and center at that, working at Deutsche Bank. I think that was the first step, we'll call it, to create capital that was sort of outside of the banking system. I think that was initially done to fill the void for where banks weren't lending. I think it was initially done as banks were selling assets as part of that for people to come in and sort of buy those assets.  

Remember, this just wasn't a U.S. issue. It was probably as big of an issue in Europe. I think what did happen on the other side of it, though, is some of the regulatory changes that went into play not just impacted the banks, but impacted sort of broader things. Things like Dodd-Frank also made companies want to stay private for longer. Or maybe it wasn't as attractive to be a public company. 

I think that drove more and more middle-market private equity to be raised. So not the big firms, like the KKR and the Blackstones were the ones who were in there early, but who were buying some of these smaller to medium-sized companies. I mean, think about the amount of small businesses that are owned in the U.S. that are even below the level of that. But this kind of onslaught or expanded reach of middle market private equity, all of a sudden somebody had to finance them, right? The banks were never really in the storage business. They were usually in the business of underwriting to distribute. It was never arguably capital-efficient for them to do that.

So then more and more pools of capital, like the direct lending dollars that we manage as part of our private credit business, had to be raised. And it had to serve the needs of those companies. I think what you saw on the other side of that is the large institutional investors who were out there wanted to, let's call it either expand or enhance their own asset allocation models. 

It used to be a pretty simple 60/40 model, 60 in public equity, 40 in sort of public fixed income. That was a nice balanced portfolio. But how did you take that down a level? So more and more people started getting dedicated allocations to private credit, people who raised money in kind of the wealth channels, that has made more capital available. Now it's able to finance not just that $20-$25 million or $50 million sort of EBITDA [earnings before interest, taxes, depreciation, and amortization] business. 

But most of the large lenders in the space can hold half a billion dollars, three-quarters of a billion dollars plus of these loans. And a lot of borrowers are attracted to use that market. Even though the growth seems, let's call it pretty rapid, I think it's played out over a long period of time. I think it's been driven by the fact, as I said, I think there's more private equity dollars there. 

I don't view that this is the banks versus the private credit lenders. I think those markets will sort of coexist. But we're believers it'll continue to grow. You could argue that the direct lending piece of it, which that is the piece that most people have equated to what private credit means, but the reality is it's more than that. You could say that the direct lending part of that market is in the middle innings or maybe even kind of the late middle innings. 

I think we just see other areas of growth. The main piece for that is our asset-based finance business, which is doing something different. But I think my numbers-- as we've probably seen a 15% kind of annual growth rate in private credit since 2010, I think you're going to see similar kind of numbers, but probably just from different spots.