Analysis: Private equity steps up lending as U.S. banks pull back

Hamilton Lane Incorporated

22/05/2023 11:00

By Tatiana Bautzer and Saeed Azhar
       NEW YORK, May 22 (Reuters) - The turmoil facing U.S.
regional banks has prompted some lenders to step back, leaving
space for investors such as asset managers, private equity (PE)
funds and insurers to lend more.
    Non-bank lenders with deep pockets have invested in credit
assets for years, but the regional banking crisis could
supercharge their expansion into areas such as providing
consumer car loans and mortgages, or financing the construction
of buildings, according to industry executives.
    A cooling U.S. economy has also prompted some large banks to
rein in lending, leaving space for money managers to step in.
        Direct lending by non-bank creditors contrasts with the
more widespread practice of banks underwriting debt that they
can sell in secondary markets. 
  
    "With loan terms tougher and tighter, the option for private
credit providers is on steroids," said Drew Schardt, head of 
investment strategy at Hamilton Lane, one of the largest
investment firms in private markets.
    PE firms including Ares Management Corp, Brookfield Asset
Management and KKR are lending in areas traditionally dominated
by banks.
    "We expect to grow further by filling the void that regional
banks are leaving as they pull back from certain types of
lending," said Dan Pietrzak, co-head of private credit at KKR,
which manages $76 billion in credit funds. Pietrzak sees
"attractive" assets in auto and consumer lending.
    In the consumer business, $550 million of loans for
homeowners buying solar panels from SunPower  SPWR.O  will be
financed by KKR, under an agreement announced earlier this
month.
    Investors are looking for real estate opportunities as well.
When American Lions sought financing to build a 363-unit
residential building in Long Island City, it got a $250 million
loan from Brookfield Asset Management.
    "We see U.S. commercial banks retreating from real estate
lending," in some cases because regulators have instructed banks
to reduce their exposure, said Andrea Balkan, managing partner
overseeing Brookfield Asset Management's real estate finance
funds. "It's times like this when we have a unique ability to
grow."

        POISED TO GAIN SHARE
  
        Investors providing private credit comprise 12% of the
$6.3 trillion U.S. commercial credit market, according to Fitch
Ratings. That compares with regional banks, which account for
$4.5 trillion in loans, or 40% of the U.S. total. 
    "The tightening of lending standards creates opportunities
for private credit to gain share," said Lyle Margolis, Fitch's
head of private credit.
    The largest U.S. banks are required to hold large amounts of
capital and follow strict rules to ensure clients' money is
safe, particularly after the 2008 financial crisis.
    Shadow banks, as the private creditors are known, are able
to lend with fewer regulatory hurdles. While private credit
funds have grown swiftly, the risks they pose to the financial
system appear limited, the Federal Reserve wrote in a report
this month.
    The International Monetary Fund painted a different picture,
warning in April that the expansion of private credit may have
added vulnerabilities to the financial system and called for
more supervision of non-banks. The lack of public information
about the loans makes it difficult for markets and regulators to
measure risks "until it is too late," the fund wrote. 
        Some PE executives reject that criticism. 
        "Private credit is very transparent. We disclose in our
earnings report every investment we make, and investors in the
private funds have access to detailed information" about the
loans in their portfolios, said Pietrzak at KKR.
  
    Ares expects an initial wave of financing deals from banks
seeking to boost their liquidity or sell assets, it said in a
report. The second wave will come from banks' reducing lending
in consumer, auto, credit cards or commercial real estate.
    "Very little activity in traditional capital markets causes
a lot of spillover into private capital," said Keith Ashton, a
partner and co-head of alternative credit at Ares. 
    PE firms have more than $1 trillion that could be deployed
on credit deals, Christopher Sheldon, KKR's co-head of credit
and markets, estimated in a recent paper.
    Investors can fill the gap left by banks in various ways.
They may buy loan portfolios directly from banks, or lend to
companies previously financed by banks. In some cases, investors
participate in derivatives transactions, taking on the risk of
loan portfolios without buying them directly.
    Goldman Sachs' asset management arm, which manages over $2
trillion, also sees potential growth as regional banks retrench
in several areas including real estate, in which the firm is
already active.
    "You'll start to see other areas becoming attractive,
including auto lending, small & medium enterprises (SME) and
consumer lending, fund financing," Greg Olafson, president of
Goldman Sachs Asset Management's alternative investments
business.

 (Reporting by Tatiana Bautzer and Saeed Azhar; additional
reporting by Matt Tracy; Editing by Richard Chang)
 ((tatiana.bautzer@tr.com; Mob: +1-646-2397968; Reuters
Messaging: tatiana.bautzer.thomsonreuters.com@reuters.net))