Page 78 - The Economist Asia January 2018

The Economist January 27th 2018
62 Finance and economics
2 lent out (see chart). In 2017 alone 24 direct- cause of the crisis and the dearth of bank offer speed and flexibility. In Caronte’s
lendingfundsraised a record $22.2bn. Such credit that ensued. Some were founded ex- case, for instance, Mr Bonanno liked the
funds do what they say on the tin: lend di- pressly for direct lending, notably Hayfin flexibility of Muzinich’s loan, such as the
rectly to firms, usually in the form of big, Capital Management in 2009, which in abilityto payitbackearly. The largest direct
multi-year loans. The borrowers are often 2017 raised more than €3.5bn. lenders, like Ares or Hayfin, can also com-
eithercompaniesthatare too small to raise Despite superficial similarities, these pete on their ability to write large loans,
equity or debt on capital markets, or priv- firms are far from being banks. Many start- even forseveral hundred million euros, off
ate-equity funds buyingsuch firms. ed out in more complex credit markets. their own bat. Since the financial crisis,
Blair Jacobson ofAres Management, an ICG, for example, specialised in the riskier banks’ lending limits have been reduced,
asset manager, says that the pummelling tranches of loans to private-equity firms. and syndication to even a dozen others
banks took in the global financial crisis Another, BlueBay Asset Management, can be like “herding cats”, in the words of
“turbocharged” the direct-lending indus- started as a bond-fund manager. Hayfin’s Andrew McCullagh.
try. Ares set up its European direct-lending Directlendersraise moneyfrom institu- Direct-lending funds also differ from
arm, now one of the largest with $10.8bn tional investors, to whom theyusually pro- banksin howmuch oftheirlendinggoes to
undermanagement, in September2007, as mise returns of around 10% or even 15%. So private-equity firms. More than four-fifths
the crisis broke. Most of the other direct- they cannot compete with the interest involves private equity in some way,
lending firms moved into the business be- rates banks charge borrowers. But they do whether to finance a buy-out or to lend
money to a private-equity-owned firm.
But that is changing. Many funds have
Monetary policy
formed ties with firms that become repeat
Central banking on autopilot customers when they need more financ-
ing. And direct lending is becoming better
known as a financing option. For certain
funds, a sizeable portion of their lending
Nigeria is shortofrate-setters
now has no private-equity “sponsor-
N THEIR quest to stabilise the job mar- Buhari’s failure to remove an official (the ship”— about 40% for Hayfin, for instance,
Iket, central banks are settinga bad actinganti-corruption tsar) whom the athird forMuzinich, and nearlyhalf in Mu-
example. Jerome Powell, whom senators Senate twice rejected. In the absence ofa zinich’s separate (albeit small) Italian fund.
this weekconfirmed as the next chair- monetary-policy meeting(and the The industry is also expanding geo-
man ofAmerica’s Federal Reserve, will lengthy communiqué that eventually graphically. As recently as 2013, Britain ac-
lead an institution with three existing follows it), the central bankposted a brief, counted for almost half of direct-lending
vacancies on its seven-memberboard, scanned note on its website, explaining deals; transactions elsewhere were often
and a fourth that will open up imminent- that it would not tinkerwith its existing done by fund managers jetting in from
ly. Not since July 2013 has its rate-setting policy stance. London. But many European countries
committee boasted the full complement Accordingto some economists, this is have allowed funds to lend without a full
of12 votingmembers. in fact just how monetary policy should banking licence. And the EU plans to har-
This monetary undermanningis, be done. Milton Friedman, forexample, monise the direct-lending market. In the
however, much worse in Nigeria. Its thought the Fed should be replaced by a firstthree quartersof2017, Britain’sshare of
monetary-policy committee was unable computerthat would increase the money newdealsfell to a shade overa third. Many
to meet as scheduled on January supply at a steady rate. Others have firms have set up regional offices, or even
22nd-23rd because it lacked the sixmem- proposed more elaborate, but equally country-specific funds such as Muzinich’s
bers necessary fora quorum. Five recent mechanical, rules. Allowinga few wise Italian, French and British funds.
nominees still await confirmation by the men and women to meddle with the Direct lending covers a broad spectrum
country’s Senate. The chamberis holding money supply, governed by theirown of activity. At one end is Muzinich, with its
up all but a few executive appointments discretion, is more trouble than it is strong focus on small enterprises. This is a
in retaliation forPresident Muhammadu worth, these economists argue. The best far cry from Ares’s boasts of being able to
central bankers strive, with all the benefit lend €300m at short notice (although Ares
oftheirerudition and experience, to be as does lend to smaller firms, too). Yet both
Nobody minding the shop boringas machines anyway. are part of a continuing structural shift in
Nigeria, % change on a year earlier In Nigeria, sadly, central banking is far Europe, as a result ofwhich small and mid-
Consumer prices from boring. Although growth has re- sized firms have a viable alternative to
turned and the stockmarket is booming, banks as a source ofcredit. 7
20
the country still suffers from stagflation: a
15 weakrecovery combined with stubborn-
10 ly high price pressures. In such a predica- One direction
ment, warm-blooded policymakers Europe-focused direct-lending funds
5
sometimes rush to fight the “stag”—by Assets under management at year end, $bn
0 cuttinginterest rates prematurely—before
2014 15 16 17 80
they have properly quelled the “flation”. “Dry powder”
GDP AFriedmanite might therefore hope that (Cash in hand) 60
Nigeria’s rate-settingcommittee remains
8 Invested
inquorate fora little longer.
4 In the scanned note, the central bank 40
+
0 welcomed recent improvements in fi- 20
– nancial conditions and promised to
4 continue its “proactivity”. One difficult
2014 15 16 17 0
art a computerwould struggle to repli-
Source: Haver Analytics 2006 08 10 12 14 16 17 †
cate is that ofirony.
†
Source: Preqin On June 30th