After a Bank of England warning in April, you could be forgiven for thinking the whole $8 trillion Private Equity market and the even faster-growing Private Credit market is about vanish up its own fundament in a massive market meltdown of the worst order since 2008! Run for the hills!… Er… Probably not… Relax… for now. The papers overdid it – as they so often do!
But it is worth considering just what the current risks and opportunities are in the Alternative Private Capital Markets space.
Rebecca Jackson of the BoE, spoke about the conclusions of its’ “Thematic Review” of the risk frameworks used around Private Equity. You can find her speech on this link and it’s well worth a read. Rebecca is Executive Director of the Prudential Regulatory Authority, part of The Bank, and runs Authorisations, RegTech and the International Supervision Directorate (ARTIS). She supervises banks and investment firms operating in the UK, but headquartered abroad. She’s been active in the supervision of the Private Equity market for nearly 20-years.
Quite rightly she is concerned at the pace and growth of the now $8 trillion Private Equity sector, describing “a Cambrian explosion in the variety and complexity of financing”. (If it’s going to talk about fossils I’m all ears – being just about old enough to be one.) Among the issues she identifies is how the scale of bank financing to the private equity sector through capital market loans and bonds, (plus they also provide enormous amounts of other leverage via warehousing arrangements), has grown. She notes the critical importance to the sector of being able to “finance acquisitions and refinance debt”.
That is what the market really fears – a liquidity crisis. If the flow of finance into the private capital markets, especially refinancing, were to stop… then $8 trillion of the $100 trillion global economy could grind to a thumping stop as highly levered firms find themselves cash strapped and headed for default, creating a Tsunami of corporate bankruptcy across the whole financial markets, resulting in a massive liquidity shock for global banking, necessitating yet more bailouts…. Oh dear… been here before….
One of the key aspects of potential pain Jackson spots is how complexity – the emergence of “leverage on leverage”, including Net Asset Value (NAV) loans secured on fund assets, and deals backed on LP interests. If this all sounds very like 2007 and the launch of CDPOs and CDOs-Cubed… yep, then you get the gist.
