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05 February 2019

Are Private Equity Firms Becoming the New Banks?

In a recent blog, we examined the rapid growth of private credit funds and noted that private equity investors are at the forefront of this trend towards alternative financing. Mark Vandevelde, in his Financial Times piece, takes it even further by suggesting that the biggest PE firms are “supplanting” traditional bank lending.

According to Vandevelde, “By setting up huge lending arms, these firms have been transformed from heavyweight dealmakers that took stakes in companies into the principal bankers for a large tract of corporate America.”

Private equity has long played a critical role between companies that need an infusion of capital or are looking to divest and LP investors looking for outsized returns. Typically, this is achieved by making equity investments in promising private companies. However, the biggest players are notorious for taking full equity ownership of companies through leveraged buyouts.

Now, according to FT, those firms “have all but pivoted from private equity to private debt, joining a new breed of lightly regulated asset managers that have filled the void as banks are forced to retreat from risky deals.”

Proponents of the private credit trend note that it fills a crucial funding gap for private companies that cannot issue public debt. These companies are often owned by private equity firms, including the same ones that are lending to them through private credit funds. And where bank lending losses pose systemic risks that can reverberate throughout the economy, private credit losses are borne solely by their investors.

Hedge funds, too, are growing their private credit portfolios. At a time when traditional long-short strategies aren’t producing the kinds of returns they used to, direct private lending is widely viewed as a viable alternative – one for which institutional investors seem to have growing appetite.

As firms in the alternative space continue to diversify lines of business, and the distinctions among them begin to blur, one constant remains: the need for a technology platform that can support complex deal structures. Geneva® World Investor (GWI) is the one platform that bridges the worlds of hedge funds, private equity, and private credit. Whether the investment involves debt or equity, or some combination of the two, GWI provides managers the flexibility to pursue new strategies to diversify their product mix as opportunities arise, while providing the transparency and reporting detail that investors demand, to learn more, contact us.

Source: Vandevelde, Mark. Financial Times. How the biggest private equity firms became the new banks. September 2018.