KEYWORDS: banks, capital markets, direct lending, disintermediation, Emerging Markets, EU, European, European Union, Hedge Fund Regulation, investor protection, leverage, portfolio diversification, portfolio management, regulatory requirements
Charles Dolan, CFA; Ralph Goldsticker, CFA; Chris Harris, CFA
The tightening of regulations around the world is prompting banks to offload a variety of financial assets onto the capital markets. This disintermediation process is giving investors access to investment opportunities that were previously the exclusive remit of banks. We believe that the investments being created by banks’ partial withdrawal from lending offers attractive potential returns and supply and demand dynamics. While many investors are aware that disintermediation is taking place, we believe that some remain confused about the scale and timing of the opportunity. While conventional wisdom holds that this opportunity has played itself out, we believe that evidence shows this not to be the case. Over the next three years, the combination of maturities in the institutional loan market and private equity capital commitments means that supply in this area will easily exceed €100 billion in Europe, even in the absence of further European bank deleveraging. From the perspective of an institutional investor, we consider the liquidity, expected returns and other characteristics of these securities and offer practical approaches as to how they might best be incorporated into a portfolio.