21 May The role of alternative credit funds in the non-bank lending environment
The source of funding for the real economy matters. Capital market financing contributes more to economic growth than bank lending by creating opportunities and an economic environment that fosters better economic management and investment in risky but often innovative projects. AIMA’s own research has shown that growing combined stock and bond markets by one-third could fuel a long-term real growth rate in per capita GDP of approximately 20%, as stock and bond market liquidity allows for cost-efficient re-allocation of capital across industries. AIMA has decided to go further and look at various components of the capital markets. Texamined the role of activist funds in the equity space and have now turned our gaze to the debt markets.
Private debt strategies have grown dramatically in popularity in recent years buoyed by both increased investment from investors into these funds as well as increased demand from smaller businesses for alternative sources of funding.3
Across Europe’s lending landscape, a quiet revolution is taking place in the way companies secure their finance. Amidst tighter banking restrictions and subsequent overall reduced levels of bank lending, the past two years has seen a significant rise in alternative asset managers jumping in to bridge the financing gap via-non bank lending. These alternative lenders consist of a wide range of non-bank institutions with different strategies including private debt, mezzanine finance and distressed debt. Hedge funds have also increased their exposure to this sector through a variety of investment strategies that can be termed, “alternative credit” which include but are not limited to direct lending, private debt, securitisation and capital relief.
As of the end of 2014, figures for Europe reveal over 350 transactions have been completed by 36 alternative lenders in just over 2 years. Deal flow has continued to grow, as the volume of deals done by direct lending funds in Europe increased 43% between 2013 and 2014. It is estimated that there are now around 40 active direct lending funds (up from 18 reported in 2012) and a further 81 new funds out in the market looking to raise £50bn. Increasingly, banks are also teaming up with alternative lenders to provide more flexible structures and there remains a strong role for them in the new lending environment.
Indeed, some of Europe’s largest institutional investors are helping to bridge the financing gap for the SME (Small and Medium Enterprise) sector by investing in alternative credit funds or taking a more direct approach and doing it for themselves. Direct lenders enjoy a growing credit portfolio across a wide range of businesses as well as providing support to a broad variety of infrastructure projects.
The alternative asset management industry plays a vital role in the world’s capital markets. Unlocking gains from market-based finance can produce significant benefits in terms of economic growth. Policymakers have an important role to play in this development as a number of restrictions hinder the activity of asset managers in the private debt space. However, it is crucial to understand that sometimes even well-intentioned regulatory intervention may lead to significant disruptions and hinder the activity it is meant to assist. The inability of the first wave of securitisation reforms to create a workable regulatory framework is perhaps the most visible example.
Read the complete report from AIMA here
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