As banks are trying to navigate the current environment, pressured on one end by market conditions, where rates have increased aggressively and quickly, and on the other end by tough regulations, in terms of capital requirements, compliance, etc, private lenders such a as hedge funds and private equity firms are filling the gap financial institutions have created. These private loans are more expensive (around 240 bps above banking loans) and tend to be well collateralized, often in the risky side, with lending often going to low rated buckets. These loans are now 20% of the total, as private lenders have been able to tap large pools of capital such as pension plans, endowments and family offices. They don’t need to be as transparent in terms of conditions as banking loans because private firms are subject to low or no regulations, and the loans do not necessarily hit the broad market. These lenders are typically also well versed in restructurings, so if the borrower defaults, they can play the whole cycle and profit from the collateral. The lending space is changing rapidly.
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