It was thought that the tightening of bank credit would help the Federal Reserve to fight inflation, but now there is a large amount of funds ready to fill the gap left by the exit of banks. The IMF warned that this may be the next thunder…
The turmoil facing regional U.S. banks has prompted some to tighten lending, giving investors such as asset managers, private equity funds and insurance companies more room to lend.
Deep-pocketed non-bank lenders have been investing in credit assets for years , but the regional banking crisis could accelerate their expansion into areas such as providing auto loans and mortgages to consumers or financing construction, industry executives said .
The cooling U.S. economy has also prompted some big banks to tighten lending, leaving room for fund managers to step in.
Direct lending by non-bank creditors stands in stark contrast to the common practice of banks underwriting debt that can be sold in secondary markets.
Drew Schardt, head of investment strategy at Hamilton Lane, one of the largest investment firms in the private equity market, said:
“As lending conditions become more stringent, there is a growing preference for private credit providers.”
“As lending conditions become more stringent, there is a growing preference for private credit providers.”
Private equity firms including Ares Management Corp, Brookfield Asset Management and KKR are snapping up the lending space dominated by banks.
Dan Pietrzak, co-head of private credit at KKR, which manages a $76 billion credit fund, said:
“We expect further growth by filling the void left by regional banks as they withdraw certain types of lending.”
“We expect further growth by filling the void left by regional banks as they withdraw certain types of lending.”
Peter Zucker sees auto and consumer loans as “attractive” assets. In the consumer business, KKR will provide $550 million in loans to homeowners buying solar panels from SunPower under a deal announced earlier this month.
Investors are also looking for real estate investment opportunities. When American Lions sought financing to build a 363-unit residential tower in Long Island City, it secured a $250 million loan from Brookfield Asset Management .
Andrea Balkan, managing partner of real estate finance funds at Brookfield Asset Management, said:
“We’re seeing U.S. commercial banks pulling out of real estate lending, in some cases as regulators direct banks to reduce their exposure. We’re uniquely positioned to grow at times like this.”
“We’re seeing U.S. commercial banks pulling out of real estate lending, in some cases as regulators direct banks to reduce their exposure. We’re uniquely positioned to grow at times like this.”
Ready to grab the market
The amount of private credit accounts for 12 percent of the $6.3 trillion U.S. commercial credit market, according to Fitch Ratings . Regional banks, by comparison, totaled $4.5 trillion in loans, or 40% of total U.S. lending.
Lyle Margolis, head of private credit at Fitch, said:
“The tightening of lending standards has created an opportunity for private credit to gain market share.”
“The tightening of lending standards has created an opportunity for private credit to gain market share.”
Top U.S. banks are required to hold large amounts of capital and follow strict rules to keep customers’ funds safe, especially after the 2008 financial crisis.
As private creditors, shadow banks are able to lend with fewer regulatory hurdles . The Fed wrote in a report this month that while private credit funds have grown rapidly, they appear to pose limited risks to the financial system.
The International Monetary Fund (IMF) painted a different picture, warning in April that the expansion of private credit could increase financial system vulnerabilities and calling for stronger regulation of nonbanks. The lack of publicly available information about these loans makes it difficult for markets and regulators to gauge the risks “until it is too late,” the IMF wrote .
Some private equity executives reject that criticism. KKR’s Peter Zucker said:
“Private credit is very transparent. We disclose every investment we make in our earnings reports, and private equity investors can get detailed information about the loans in the portfolio.”
“Private credit is very transparent. We disclose every investment we make in our earnings reports, and private equity investors can get detailed information about the loans in the portfolio.”
Ares said in a note that banks are expected to initiate a first wave of funding deals to boost liquidity or sell assets; a second wave will come from banks reducing lending to consumer, auto, credit cards or commercial real estate. Keith Ashton, Partner and Co-Head of Alternative Credit at Ares, said:
“There has been very little activity in traditional capital markets, resulting in massive spillovers to private capital.”
“There has been very little activity in traditional capital markets, resulting in massive spillovers to private capital.”
Christopher Sheldon, co-head of credit and markets at KKR, estimated in a recent paper that private equity firms have more than $1 trillion in capital available for credit transactions.
Investors can fill the gap left by banks in a variety of ways. They may purchase loan portfolios directly from banks, or lend to companies previously financed by banks. In some cases, investors trade derivatives to gain exposure to loan portfolios rather than buying them outright.
Goldman Sachs’ asset management unit, which manages more than $2 trillion in assets, also sees growth potential as regional banks scale back investments in various sectors, including real estate. Greg Olafson, President of Alternative Investments at Goldman Sachs Asset Management, said:
“Other areas, including auto loans, SME and consumer loans, fund financing, etc. are expected to become attractive.”
“Other areas, including auto loans, SME and consumer loans, fund financing, etc. are expected to become attractive.
