On the opening morning of PDI’s Capital Structure Forum in London last week, chairman Sanjay Mistry, director of private debt at consultants Mercer, revealed the news that all seven of the UK’s largest bank lenders had successfully passed the latest stress tests they are regularly forced to undergo by the Bank of England.
This was the first time a clean bill of health had been declared since the tests were launched in 2014 and, in the Bank of England’s words, meant that “the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs”.
“What does that mean for private debt funds?” Mistry wondered aloud. “After all, part of the evolution of the asset class has revolved around a bank replacement theme.” It’s clear what Mistry was getting at: Would a newly confident banking sector, balance sheets largely repaired, now go about reclaiming the market share it has lost to debt funds since the financial crisis?
In this article from our recently published Europe Report, it seems that finding an answer is not simple. The point is made that, unlike in the US, banks never really left the party – market share has been lost on a relative basis but they have always been major players. However, there is indeed talk of banks moving from retrenchment to an expansionary phase.
“Market rumours are that some banks have been considering establishing their own direct lending funds,” says Floris Hovingh, partner and head of alternative capital solutions at financial services firm Deloitte. “It could be an interesting move as it would bring them into the asset management space rather than lending just from their balance sheet with the fee generation capacity that brings.”
Debt funds needn’t necessarily worry too much about the competitive pressure this might be expected to bring, however. There is a view that a booming European refinancing market, expected to grow from less than $60 billion in 2017 to $90 billion in 2020, according to Dealogic, will be the main target of bank-owned funds – and here there is “a significant need for additional capital”, says Monica Barton, a partner at law firm Reed Smith.
In any case, the way forward for banks is unclear. For one thing, however stronger their balance sheets have grown, they are still hampered by the regulators. Moreover, launching their own funds could raise concerns over conflicts of interest.
For these reasons, it seems likely banks will more often be partners to private debt funds than competitors going forward. The Capital Structure Forum heard numerous ways in which this growing collaboration is becoming apparent, for example by tapping into origination expertise or taking different slices within the capital structure of deals. Banks have also focused increasingly on providing ancillary services such as risk management and advisory services.
In sum, it’s too simple to say the empire is striking back. A mixture of friendly alliances and the occasional border raid better sums up the complex relationship between bank and non-bank lenders heading into 2018.
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