Friday letter: Foes no more

The last year has finally brought a defrosting of relations between banks and alternative lenders in Europe. But why, and why now?

On Wednesday, Private Debt Investor celebrated its first anniversary with a panel conversation and cocktail event hosted by the Royal Bank of Scotland. Although one year represents only a short period of time in the life of a private debt fund, let alone a new asset class, the panel’s comments reflected just how much the industry has changed since our launch.  

When PDI unveiled its first issue in early 2013, we rooted our editorial coverage to an investment thesis that had gained considerable traction through the post-crisis era. New regulation had shortened the leash on bank lending, creating a vacuum that could be filled (at least, partially) by private equity firms’ formation of private debt funds. 

However, it quickly became apparent that the thesis had limited accuracy. Private debt funds, and private debt managers, had existed for some time. And although the implementation of Basel III and Dodd-Frank facilitated the growth of those funds, it was surprising to see just how much of their business relied upon their relationships with banks, either as competitors or as partners.   

According to M&G Investments’ William Nicoll, who heads that firm’s non-bank lending operation and on Wednesday spoke on our panel, in the years following the crisis banks were often suspicious of private debt funds. Their concern was that those funds would poach their clients (even though debt funds typically cannot — or have said they don’t want to — offer the advisory and investment banking services required by many borrowers that the banks can).

The banks' refusal to support them created difficulties for fund managers, many of which lack the size and scale necessary for originating direct loans to corporates, particularly those outside of core markets. “If you want to be in Italy, you need a team there,” said Nicoll, while speaking on the panel. The banking sector’s decision to act antagonistically limited fund manager access to the banks' networks, essentially adding barriers to entry for private lending.

It hasn’t been until recently that relationships have begun to warm. The joint venture of BlueBay Asset Management and Barclays, as well as the longstanding partnership maintained by Ares Management and GE Capital, highlight the degree to which supposed competitors can benefit from working together.

Of course, the improvement in relations hasn’t come from nowhere. Alcentra managing director Pascal Meysson posited that the attitudinal adjustment may be a product of the banking industry’s awareness of sponsors’ growing demand for unitranche financing, which frequently includes loans from both private debt funds and banks. In other words, the banks have realised that partnering with the funds is likely to create opportunities for them that are too good to pass up. 

Private Debt Investor commented on the market’s growing appreciation of unitranche in last week’s Friday Letter, but the degree to which that product’s popularity bolstered the banking industry’s taste for private debt funds has, until now, gone largely unreported. As this trend continues, we'll work hard to provide the reporting.

In the meantime, the evolution of constructive coexistence between banks and funds remains a work in progress. But at this point in the cycle, it looks like the progress being made is good. ??

Private Debt Investor will be hosting its second annual conference on 28th to 29th October 2014. For event details, please visit https://www.privatedebtinvestor.com/capitalstructure/