There is a growing argument that the reason there isn’t greater concern surrounding the ramp in private equity is that the perceived source of debt is misunderstood. An article in the WSJ argues that regulators don’t believe banks are overly exposed, and that simultaneously this exposure is increasingly difficult to monitor. Per the article, banks continue to lend to this space via vehicles that reduce transparency in the market. Three examples are provided:
- “Loans to nonbank financial companies have been the fastest-growing element in global cross-border lending for the last two years.”
- “Loans to funds that buy up pools of second-hand stakes in private equity funds; or loan funds that in turn lend directly to private companies.” The latter would include BDCs which only recently received approval to double the amount of leverage deployed in making these investments from 1:1 to 2:1.
- A growing number of ETFs and mutual funds now make direct investments in leveraged loans, which fund private equity transactions.