How banks profit from PE
The Fee Machine
Banks profit at every step of the PE/PC chain — and earn nearly 4x the return doing it.
Banks no longer need to hold the risk to profit from it. They arrange the debt, warehouse it, package it into "AAA" CLO tranches, and sell those to PE-owned insurers — collecting a fee at every node while the end holders (pensioners, annuity holders, retail investors) carry the loss. Lending to private-credit funds returns 29.2% on equity versus 7.9% for ordinary corporate lending.
The fee chain
- PE firm does the LBO — acquires at 10–14x EBITDA with 60–70% debt.
- Bank arranges the debt — $3.5–8M in fees per $100M arranged.
- Bank warehouses the loans — earns SOFR + 200–400bp while holding.
- Bank packages into a CLO — 1–2% structuring fee.
- CLO senior tranche rated AAA — junk repackaged as "safe."
- A PE-owned insurer buys the tranche (Athene, Global Atlantic, Fortitude Re).
- Insurer reports at amortized cost — no mark-to-market, no visible losses.
- End holders — annuity holders, pension beneficiaries, retail investors — bear the loss.
Bank commitments — the big players
| Bank | PC Commit ($B) | NDFI ($B) | IB Fees ($B) | CLO ($B) |
|---|---|---|---|---|
| JPMorgan Chase | $50 | $310 | $10 | $45 |
| Goldman Sachs | $145 | $250 | $9.3 | $35 |
| Bank of America | $25 | $200 | $7 | $40 |
| Citigroup | $25 | $180 | $6 | $30 |
| Morgan Stanley | $30 | $150 | $5 | $25 |
| Wells Fargo | $7 | $120 | $4 | $20 |
| Norinchukin Bank (Japan) | — | — | — | $54 |
Per $100M LBO, total bank fees run $4.5M–$10.3M; on a $5B LBO the arranging bank earns $175M–$400M, largely risk-free. Norinchukin — the world's largest single CLO investor at $54B — lost $9.3B in FY2024 on CLO markdowns: Japanese farmers' deposits backing leveraged US buyout debt. A $500M CLO typically slices into AAA (65%) down to BB/Equity (12%), the AAA tranche rated pristine despite B/B- collateral.
Frequently asked questions
How much more do banks earn lending to private credit?
Nearly 4x: 29.2% ROE versus 7.9% for traditional C&I lending.
What is NDFI lending?
Bank lending to non-depository financial institutions, including PC funds. It hit $1.32 trillion, quadrupling since 2016.
How much does a bank earn arranging an LBO?
$3.5–8M per $100M arranged — $175–400M on a $5B LBO, largely risk-free.