Hedge funds boost loans to companies as banks shy away

By John O'Donnell and Dasha Afanasieva

FRANKFURT/LONDON (Reuters) - Private equity firms and hedge funds had funds under management of $600 billion globally last year to lend to companies, a survey said on Wednesday, as they step into the shoes of traditional lenders.

The trend highlights a shift away from banks as a source of finance after the financial crisis, as bad loans given in the past continue to linger.

It also shows how central bank money printing since the crash has helped to bolster private equity funds.

That has created an industry known as private credit, where alternative providers lend at higher interest rates to companies, which may otherwise struggle to get money from a bank.

 

The survey by the Alternative Credit Council, part of a trade group, found that this industry has grown 14-fold since 2000, had more than $600 billion under management last year, putting it on track to reach around $1 trillion by 2020.

The survey also said Germany, the United Kingdom, the United States, France and Canada had the biggest potential for this type of financing in the next three years.

"The pull back by banks has created a vacuum which non banks have filled," said Chris Redmond, a debt expert at Willis Towers Watson, which advises pension funds.

Private equity firms, which traditionally invest in management buyouts of companies, are looking at this business partly because of an increase in the prices of the companies they seek to buy.

Hedge funds, which seek to make money betting on the fortunes of a company, currency or an economy, have struggled to generate stable profits and are eager to diversify.

With more players entering the market, some are turning to Europe.

"Whilst the US private credit market is the most established global private credit market, Europe is closing the gap quickly, having witnessed huge growth in the sector since the financial crisis," the report's authors wrote.

The interest rates charged by these providers can go as high as 8.5 percent annually, according to industry experts.

"It is high levels of interest," said Redmond, who said that this had attracted investors, struggling to find returns elsewhere.

"We are concerned about some things going on in credit markets but private debt, as it stands, remains interesting and safe," he said.

The survey also found that nearly half of lenders surveyed said loan terms had become less demanding in the past three years.

Allan Nielsen, Managing Director at Ares, an asset manager which took part in the survey, said: "We definitely see diligence standards dropping ... (but) I think the private debt community will be better at handling a downturn."

The Alternative Credit Council is part of the Alternative Investment Management Association, whose members are chiefly hedge funds. Researchers contacted 60 managers involved in the sector.

(Editing by Jane Merriman)