With calls for decreasing regulation of banks in the US, European-domiciled private debt managers are upbeat about the regulatory outlook closer to home. GPs tell PDI they don’t see regulatory developments hampering private debt as an asset class in the near future.
The paring back, or full repealing, of the Dodd-Frank Act in the US may open the door to banks increasing their lending to small and mid-sized businesses. This would have implications for private debt managers, which have been able to find greater lending opportunities with the banks retrenching from the space.
While the US might be in a position to dissect and pare back post-2008 regulations, Europe isn’t in such a position, says Jakob Lindquist, co-managing partner at fund manager CORDET Capital. “I would argue that the US went through the financial crisis quite quickly,” he says.
In Europe, however, a more prolonged after-effect from the financial crisis hasn’t lessened the call for further regulations. “The increased regulatory oversight in Europe, in my view, is only getting stronger,” Lindquist adds.
In the UK, it’s unlikely banks will have more flexibility granted to them any time soon. “My observation is that the UK is still very concerned about having another banking failure,” Paul Shea, founding partner at Beechbrook Capital, says.
Shea previously told PDI he believed regulators would treat private debt fairly. The financing that the asset class provides to small businesses should be viewed as valuable, he noted. Brexit may bring about lower regulation in the UK, however. “Brexit could result in lighter regulation, which would be positive, but I don’t expect to see that happen anytime soon,” Monica Gogna, a partner at law firm Ropes & Gray, says.
Another possibility, Gogna adds, is UK regulators being influenced by decisions taken across the Atlantic. If the US retrenches on regulation it may cause a bigger shift in the position of UK regulators than the exit from the European Union. If banks continue to be regulated and hampered from lending, the opportunity for private debt managers should increase. “It ultimately means there are fewer sources of financing for SMEs,” Lindquist says. “The business opportunity is only going to increase.”
“The catalyst for the large growth of private debt funds is partly due to credit being significantly limited, almost overnight, during the financial crisis,” Giles Travers, director of alternative investment funds for SEI Investment Management Services’ fund administration group, adds. “They’re [banks] looking at their balance sheets more closely and what loans they’re going to take.”
Even if banks do face less regulation, the effects might not all be negative. GPs lending to real estate, for example, could benefit, Mikko Syrjanen, co-head of real assets at Aalto Invest, says when talking about providing credit to this sector. “The normal home owner would generally find it easier to get a mortgage,” he says. “That could be good for us. The value of our existing housing would potentially be going upwards.”
Despite the prospect of increasing regulation, it’s still worth noting that banks do still dominate much of the loan market. “The fundamental point is, in Europe, there have always been a lot of banks and there will always be a lot of banks,” Shea says.
Lindquist adds that “95 percent” of corporate lending to SMEs is done through banks. “They are the incumbent, but are they losing share? Yes,” he says.