T.HERE ARE many ways to tell the story of the turnaround in the American capital markets since last spring. The focus was on the public markets, especially the miraculous surge in stock prices. But the change in the wealth of private equity (SPORTS) is perhaps more notable. A year ago SPORTS Riese reported a loss of more than $ 1 billion in the first quarter. A settlement seemed overdue. Widely used default settings for unserviceable SPORTSOwn companies were expected. A year later, Blackstone posted record profits of $ 1.75 billion. So much for the Comeuppance.
His rude health has a lot to do with the speed and extent of the recovery in asset prices. Buyout shops barely had time to list their portfolio companies in line with a falling stock market before stock prices suddenly rebounded. Dealmaking has grown rapidly. Competition from corporate buyers means buyout companies need to act quickly. Where they have an advantage is taking on debt. Indeed the premium on speed in SPORTS Because of this, expect a major recovery in a related corner of the capital markets – private credit.
Private loans mainly serve medium-sized businesses that are buying something or changing in some form – by buying up a family member’s stake; Refinancing their bank debt; and so on. Most often this change is carried out under the auspices of a SPORTS Sponsor and require a lot of borrowing. Banks used to finance this, but no longer. In order to gain access to the public markets, a company must meet the requirements of the regulatory authorities. It has to be big and profitable, with a history of flawless degrees. Many companies don’t tick the boxes.
Private loans contain elements of both bank and capital market financing. It is like a bank loan in that it is tailored to the borrower and does not usually change hands in the markets. It’s like a publicly traded bond that the end investors are pension and insurance funds looking for regular fixed income securities. The line between private and public credit is blurred. The decisive factor is how widely a loan is distributed. The most well-known segment of private lending is the market for leveraged loans, which are fixed income instruments that are sold to consortia of investors. The more widely a loan is distributed, the more liquid it is. A broadly syndicated loan can be sold to 100 or more lenders. In contrast, the number of parties involved in a truly private business is often in the single digits.
The bigger SPORTS Firms have private weapons of credit. The skills required are similar, says Mike Arougheti of Ares, a private asset manager. Both types of investor need to make informed judgments about cash flow growth and the associated threats to businesses that are not fully researched. There are obvious synergies. Say a SPORTS The company performed due diligence on a buyout target only to lose to an offer from a competitor. After homework is done, the losing company can call the winner and offer to buy the debt.
This connection with SPORTS is one reason to expect personal lending to rise. To the SPORTS Sponsors, the attraction of personal loans is speed. There are no lengthy discussions with regulators, rating agencies or underwriting banks. And speed is more important than ever. Buyout funds have at least $ 1 trillion in “dry powder,” capital that has been raised but not yet used. “The stock markets have rebounded so corporate buyers are competitive,” said Mark Attanasio and Jean-Marc Chapus of Crescent Capital, a private credit company. The result is that each potential target has many bidders.
The other reason to expect personal credit growth is because of its attractiveness to investors. The returns are higher than widely traded corporate bonds. In addition, interest rates on personal loans are usually tied to short-term interest rates. This protects investors from sudden changes in Federal Reserve policy to which fixed income corporate bonds are vulnerable. Personal loan specialists usually demand greater control over loan terms. In this way, they can reduce the risk of a borrower getting into trouble. They are also better able to get more of their money back in the event of a failure. In a lightly syndicated business, there are fewer people to indulge in lavish arguments over the remains.
Everything happens faster on the capital markets. Although the private markets do not trade by the minute, there is little time to lose. It seems as if regulators were publicly angry yesterday at the unbridled growth of the opaque personal credit markets. Then it got quiet. But the noise level could rise again soon.
This article appeared in the Finance & Economics section of the print edition under the heading “Up to speed”.