Plugging the capital hole

Banks and debt funds need not be at loggerheads. But the successful partnerships will be found where capital is lacking.

Earlier this week, Blackstone’s credit arm GSO Capital Partners and Italian lender, Intesa Sanpaolo, announced a new partnership.

Though the finer details of the partnership are yet to be finalised, it is understood that Intesa will source mid-market Italian corporate borrowers and then Blackstone will decide whether or not to lend to them. The partners have not said what their target lending volumes are, though Intesa is motivated by getting a finders’ fee for sourcing the deals, PDI understands.

Nevertheless, though not a firm commitment by Blackstone to lend, for the credit-starved Italian mid-market, a new source of even potential funds is going to be welcome. 

Instances of set-ups between debt funds like Blackstone’s and banks are increasing. 

In Germany, for example, ValinFunds, a fund controlled by the asset management arm of IKB, uses the German lender’s origination network to source loans to non-sponsor-backed businesses within the German mittlestand. IKB’s asset management arm is also actively seeking other banks in peripheral European countries to partner with to source credit opportunities. 

While Ares Management and GE Capital have renewed their European co-operation with the launch of a €3 billion European Loan Programme which will join syndicated and club deals and will focus on senior debt (their other joint ventures focus on unitranche debt in Europe and the US). That relationship is a little different, however, as both Ares and GE are bringing both deal sourcing and capital to the table. 

Such debt fund and bank partnerships have the potential to be successful and beneficial for both sides. But that outcome is not guaranteed. Take the partnership between asset manager BlueBay and bank Barclays announced in January 2014, for example. The two lenders have done one deal together.

Of course the difference between the BlueBay-Barclays tie-up and the new GSO-Intesa agreement is capital. Barclays can still lend whereas Intessa is a little more constrained.

The fund-bank lending partnerships that are most likely to succeed will be those between banks that still have large networks and established relationships, but which have struggled under the weight of new regulatory restrictions on leverage and capital adequacy ratios.

Intesa, along with the entire Italian banking sector, is struggling to lend to business as it husbands its capital resources to meet new regulatory requirements. It is moving €46 billion in bad assets into its new workout unit, Capital Light Bank. Similarly, Germany’s IKB was a high profile victim of the financial crisis. It was the first German lender to get a government bailout. It has longstanding relationships with German mid-market borrowers – the ones that everybody wants to lend to – but the shift in its business model means that it doesn’t want to offer cheap loans from its own balance sheet. 

Looking ahead, another bank that struggled in the wake of the crisis and is now examining the possibility of referring customers to private lenders for cash, is Royal Bank of Scotland. How exactly this will work in practice has not yet been revealed but it seems fair to assume the UK lender is looking at a similar model to its tie-up with a number of marketplace lending platforms

For banks struggling with capital ratios or seeking to maintain profitable ancillary business lines without the loss-leading loans that secure that business, private debt partnerships would appear to be a good thing. And if the traditional lenders can turn on the taps for strong flows of good deals, then in the short-term it can only benefit debt funds too. 

Not every traditional lender fits these criteria. A lot of European banks have come through the worst of the crisis and are on a decent capital footing ahead of the full implantation of Basel III by 2019. But there are enough traditional lenders that do. Co-operation is a natural characteristic of the market after all but both sides are unlikely to forget that competition is also key in debt markets.