BoE warns competition from private credit funds may result in lower quality products
The rise of private credit funds and the resulting increase in competition in the lending market could lead to a deterioration in quality and pricing, warned Bank of England regulator Rebecca Jackson.
She noted the “Cambrian explosion in the variety and complexity of financing products that banks now provide to the private equity industry,” in a speech to UK Finance in London yesterday.
“Here we see the emergence of complex structures and ‘leverage on leverage’, including net asset value (NAV) loans secured by fund assets, which provide leverage to funds against already leveraged portfolio companies,” she said. “Growth in secured financing facilities, for example, backed by Limited Partner interests, has also been a notable trend.”
Jackson, who is executive director for authorisations, regulatory technology and international supervision at the Bank, said this increase in complexity has been driven by a range of factors, including investors seeking exits from illiquid long-term private assets amid a lacklustre initial public offering market.
Read more: BoE: Private credit vulnerable to macroeconomic shifts
“We have seen the emergence of private credit funds, who both raise financing from banks in a mutually beneficial relationship and compete directly with them to provide both traditional and non-traditional forms of leverage,” she added.
“Competition is the mother of invention, one might say, and we think this competition may be an important driver of the new forms of bank lending that we’ve seen. But while such competition has a role to play in ensuring that borrowers can access the funding they need, competition in any market tends to affect the price and quality of whatever is offered in that market, and sometimes not for the better.”
Jackson’s comments come after Nathanael Benjamin, the Bank’s executive director for financial stability strategy and risk, raised concerns about the increase of NAV financing in the private equity world, due to opacity around the quantity of leverage entering the system.
In a speech made earlier this week, Benjamin said “there are natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem.”
Read more: Lenders report increase in default rates in Q1
