#private credit

11 12, 2023

Karen Petrou: Unicorns, Zombies, and Capital Regulation

Eliza Allen2023-12-11T10:23:04-05:00December 11th, 2023|The Vault|

As was again clear at last week’s Senate Banking hearing, credit availability is much on the mind when it comes to LMI communities and small business. This makes a good deal of sense given the capital proposal’s unintended consequences, but it’s only part of the story. When start-up ventures are unable to get bank loans, they turn to the capital market. This is often necessary due to the start-up’s risk, but in recent years it’s also been driven by hundreds of billions of investor dollars desperately chasing higher yields as the Fed year-in, year-out kept real rates below zero. Now that rates are finally, really positive, yield-chasing funds have evaporated. As the New York Times made clear, unicorns have turned into zombies. Some of the walking dead deserved to die long ago, but the flood of capital-markets funds exiting this sector also strands ventures that could and should have been vital innovators. Had these entities been buoyed by bank loans as soon as they were viable, many would still be walking.

Not every zombie is an innovator we’ll sorely miss. Many bet big on not-so-critical products such as still more scooters. However, one sector left high and dry – early-stage biomedical research – is literally a matter of life and death.

In February of 2021 when the economy was growing but real yields were negative, the total enterprise value of approximately 700 publicly-traded biotechs was $598 billion. As of the latest data, this is down to $213 billion …

Karen Petrou: Why Curbing Banks Won’t Curtail Private Credit

Eliza Allen2023-12-04T11:03:15-05:00December 4th, 2023|The Vault|

Last Wednesday, Sens. Brown and Reed wrote to the banking agencies pressing them to cut the cords they believe unduly bind big banks to private-credit companies. The IMF and Bank of England have also pointed to systemic-risk worries in this sector, as have I. Still, FSOC is certainly silent and perhaps even sanguine. This is likely because FSOC is all too often nothing more than the “book-report club” Rohit Chopra described, but it’s also because it plans to use its new systemic-risk standards to govern nonbanks outside the regulatory perimeter by way of cutting the banking-system connections pressed by the senators. Nice thought, but the combination of pending capital rules and the limits of FSOC’s reach means it’s likely to be just thought, not the action needed ahead of the private-credit sector’s fast-rising systemic risk.

One might think that banks would do all they can to curtail private-credit competitors rather than enable them as the senators allege and much recent data substantiate. But big banks back private capital because big banks will do the business they can even when regulators block them from doing the business they want. Jamie Dimon for one isn’t worried that JPMorgan will find itself out in the cold.

Of course, sometimes banks should be forced out of high-risk businesses. There is some business banks shouldn’t do because it’s far too risky for entities with direct and implicit taxpayer backstops. This is surely the case with some of the wildly-leveraged loans private-credit companies …

Karen Petrou: The Apples-to-Martians Comparison of PE Capital to That Demanded of Banks

Arezou Rafikian2023-11-13T15:47:14-05:00October 16th, 2023|The Vault|

What is capital? We talk a lot about how much banks should hold and what more bank capital means to whom. But few have said much about what regulatory capital actually is. That’s a signal, strategic omission as private-equity firms spin a tale of capital resilience without actually having anything comparable to what banks must raise even as nonbanks take over more and more financial markets key to stability, economic equality, and macroeconomic growth. Let nonbanks compete wherever they can, but suggestions that private equity hold more capital than banks is a whopper that cannot go unchallenged as lending migrates to these powerful firms.

In a New York Times article over the weekend, Apollo’s chief executive reiterated a point he’s made before: that his firm’s lending activities are backed by “more Tier 1 capital” than banks are required to hold. As the Times article then observes, the assets that “constitute” Apollo’s capital and that of other PE firms are low-risk and thus a source of “permanent capital.” Or so it is said.

But the assets Apollo calls capital are just assets – not capital of any tier – under banking rules. Assets they also are when one remembers how balance-sheets work. The billion-dollar balance-sheet question is always what stands between assets and liabilities if asset valuations drop. For banks and, indeed, anyone else with a balance sheet, that’s capital – not more assets deepening the void between assets and liabilities.

The term “permanent capital” actually derives from insurance regulation. It …