PE Firms Increase Their Business Lending Prowess

Private equity firms, driven in part by an influx of cash from investors looking for more yield on their investments, have been acting as lenders, financing deals that banks are shying away from.

The Wall Street Journal, citing private equity firms including Ares Management and industry watchers, reported that nonbanks, many of which are PE firms, held more than half a trillion dollars of loans to mid-sized businesses at the end of last year, which is up from around $300 billion six years ago. The new competition from PE firms is a boon for borrowers, given the competition has led to a loosening of credit standards, reported the Wall Street Journal. “I don’t think it could become any more borrower-friendly than it is today,” Kent Brown, who advises companies on debt at investment bank Capstone Headwaters, told the Wall Street Journal.

The lending side of nonbanks is only expected to grow even more as smaller PE firms try to get more loan business.  The paper noted that at the end of last year, PE firm KKR inked a partnership to create a business development company focused on making business loans, while Blackstone and Carlyle Group plan to raise billions more of dollars to put solely toward business lending. The WSJ noted that Apollo Global Management, another PE firm, and its affiliates have been buying and expanding lenders to increase its business in that area. Ares, which was an early PE firm to enter the lending market, raised $10 billion in the second quarter for middle market lending, which was a record.

“This is a seismic change in the marketplace,” said Richard Farley, chair of the leveraged-finance group at Kramer Levin Naftalis & Frankel, in the report. “What was once a business that was just for deals that were too risky or too small for the banks is now a business that could compete with the banks.” The paper noted that the PE firms’ entrance into the lending market for medium-sized business could be the reason banks are seeing sluggish loan growth even as the economy continues to boom. The paper noted that nonbank commercial loans increased 7.5 percent in the first quarter on a year-over-year basis while banks saw a 3.6 percent increase.