Number of fund managers lending directly to firms soaring
Fund managers have been quick to fill the lending void, particularly in the US
The number of asset managers lending directly to companies in the US and Europe has more than doubled in the past two years, underlining fears about the rapid development of financial intermediaries known as shadow banks.
The 120 per cent rise in the number of fund managers operating direct lending strategies has come as banks have been forced to scale back their lending activities due to regulatory pressure to shrink their balance sheets.
Asset managers have been quick to fill the lending void, particularly in the US, where the number of direct lending managers has jumped from 44 to 110 in two years. The number in Europe has nearly doubled to 85.
Assets in the industry have more than tripled since 2006 as a result, to $441 billion (Dh1.61 trillion) by the end of last year, according to figures from Brown Brothers Harriman, the financial services group, and Preqin, the data provider.
Private debt
Some of the biggest nonbank lenders to small and medium-sized enterprises include Oaktree, the US asset manager, Centerbridge, the US private equity firm, and Intermediate Capital Group, the UK asset manager. Collectively they have raised nearly $90 billion for private debt in the past decade.
The rapid development of the private debt market — seen as part of the shadow banking industry — has prompted concern among regulators and some industry figures.
The US Financial Stability Oversight Council, a grand committee of regulators set up after the 2008 financial crisis, said last month that the migration of leveraged lending away from banks could lead to sloppy underwriting, resulting in “larger losses in stressed conditions”.
David Pitt-Watson, executive fellow at the London Business School and former director of Hermes Fund Managers, said it was a “good idea” for fund managers to finance the real economy, but raised concerns about their expertise and liquidity issues. He said: “Do fund managers know the companies they are lending to? Or are they buying packaged debt, and do they understand what lies behind it? [Should] this not be the job of recapitalised banks, who have the expertise and money to lend?
“What happens if there is a run on the fund? How do [investors] get their money back? Banks can borrow from the central bank, fund managers cannot. Right now, well-run funds, where illiquid SME debt is only a small part of their assets, might be a helpful development. But those conditions are not easy to police.”
Alternative lending in Europe accounts for around 20 per cent of the market, according to the BBH/Preqin figures. In the US, non-bank lenders accounted for 85 per cent of leveraged loan activity in 2013, up from 37 per cent in 1998.
Rapid expansion
The industry is expected to continue expanding rapidly in both regions as investors intensify their search for yield in the low-rate environment.
David Blake, director of the pensions institute at Cass Business School in London, also expressed doubts about the role of fund managers in private lending.
“In principle this is a good idea, since SMEs are now very badly served by the official banking system in terms of high interest rates, onerous collateral conditions and the risk of withdrawal of funds at short notice,” he said.
“However, for it to work well, there needs to be strong trust [between borrowers and lenders]. The question is do fund managers, with their utterly short-termist attitudes, have the temperament to do this well?”
Chris McChesney, head of alternative investor services at BBH, rejected these concerns. “The term shadow banking implies an unregulated environment. We are talking about non-bank lending rather than shadow banking, and a capital base that in some ways is more stable than loans backed up by bank deposits,” he said.
“There is a fundamental change under way in [how] asset managers see themselves [in relation to] companies and borrowers.”