Despite regulatory concerns about the growth of the private debt market, investment specialists told the IPE Conference & Awards 2024 event this week that such lending makes an overall economy more resilient, and said private debt funds are less risky for the system than bank lending.
In a discussion on investment in private credit at the event in Prague, Christoph Gort, managing partner of Zurich-based alternative investment specialist SIGLO Capital Advisors, said it was good in an economy to have both bank and private debt lending available to potential borrowers.
“It forces some competition that at the end of the day should lead to marginally cheaper credit, which for an economy is really really helpful,” he said.
“This is why it’s overall an asset class that is strategic and most likely will survive because it just makes the economy overall more resilient – regardless of whether the lending per se is better or worse,” he said.
Gort, whose firm was acquired this autumn by global investment firm Cambridge Associates, said the private debt world could bring financing to a large set of companies – typically smaller companies – that had trouble finding finance, and from that perspective it was very complementary to bank lending overall.
The panellists were answering a question on what made private lenders better than banks at lending to companies.
Pascal Böni, professor of finance and private markets at Tilburg University, responded that equity requirements were much higher for banks than for credit funds.
“But on the other side, the equity liability in terms of how much these funds are levered or unlevered is much higher on the fund side,” he said.
He said UBS, for example, had equity on its balance sheet of 5%, while he knew of no private debt funds which had 95% leverage.
“So from a system risk point of view I think this makes them much less risky,” he argued.
Tatiana Lazareva, executive director, Franklin Templeton BSP-Alcentra, the third panellist speaking at the event, said one area where private debt providers had an edge over traditional bank lenders was their ability to restructure and deal with problems regarding loan investments.
She said she strongly believed that ability was also a major differentiator “between a good and not-so-good” private debt manager.
Problems would always occur in lending, she said.
“It’s never 100% a happy place. Some of the borrowers will experience difficulties and a GP would have more flexibility to deal with that and have a dedicated team to restructure and maybe put more capital into this than a bank,” said Lazareva.
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