Breakingviews: KKR takes private markets right up to the checkout

Private equity has a new customer: Joe Public. Buyout firm KKR announced a partnership on Tuesday with financial technology firm PayPal, under which it will fund the short-term loans that PayPal offers to consumers at the point of payment, as an alternative to credit cards. It’s a cozy arrangement for all involved, and marks another step in private lenders’ encroachment into traditional financiers’ turf.

So-called “buy now pay later” loans are a fast-growing novelty: PayPal’s $6 billion in payment volume in the first quarter was 70% higher than a year earlier. Until now, the company had funded this effort itself, sending retailers money up front and collecting from customers in due course. KKR will now purchase and hold up to 3 billion euros of PayPal’s BNPL loans, originated in five European countries and typically a few months in duration. New loans will go in as old ones are paid off, to a maximum of 40 billion euros.

PayPal benefits by shifting the funding of these loans off its balance sheet – including part of the $402 million in provisions for credit losses incurred last year. It also gets about $1.8 billion in proceeds upfront, with $1 billion of that funding share repurchases.

The value for KKR is more complicated. PayPal’s BNPL loans mostly don’t charge interest or fees, so KKR’s only way of making a profit is to buy them at a discount to face value – which could be substantial since funding costs in debt markets have risen. The risk it takes is that customers renege, but projections for consumer defaults are far from catastrophic. BNPL operator Affirm’s loss allowances stood at around 5% of its held loans in the most recent quarter, while Citi has set aside provisions that would cover 8% of its U.S. credit card balances going bad.

KKR can pump up its returns using leverage – the deal is funded partly from loans made by its own credit funds. But the real appeal might be finding a new source of growth for its $510 billion heap of assets. Meanwhile, traditional sources of financing have been receding from some corners of the lending markets: public securitizations were 11% of the asset-backed market in the third quarter of 2022, KKR says, down from 64% in 2006. Banks can rest easy that BNPL is unlikely to replace the credit card any time soon, but there’s no denying financial upstarts are nipping at their heels.