Hedge Funds and other Non-Bank Lenders Woo Small and Mid-Sized Companies

By Hedge Fund Insight staff


Hedge fund firms and other alternative asset managers are playing an increasingly important role in financing the economy, according to a paper published by the Alternative Investment Management Association (AIMA) this year.

The paper says that private debt funds such as hedge funds now manage around $440 billion in assets, with some $64 billion of new capital allocated to the sector in 2014 alone.

A quarter of U.S. small businesses and mid-sized companies are obtaining credit from non-bank providers, and nearly all have found the experience so positive that they would borrow from a non-bank lender again.

Approximately one-quarter of the 218 small businesses and mid-sized companies taking part in the latest Greenwich Market Pulse* (from Greenwich Associates) obtained credit from a non-bank provider in the past 18 months. That finding is consistent with results from a Q2 2014 Greenwich Market Pulse.

About 8 in 10 of these companies say the process of obtaining credit is easier with non-banks than with traditional banks. A full 51% contend it is “much easier” to get credit from non-bank lenders. Of even more concern to traditional banks is the fact that roughly 94% of non-bank borrowers say they would obtain credit from a non-bank provider again. That share is up from the approximately 89% of non-bank borrowers who said they would return to non-banks for credit last year.

Non-bank lenders have re-emerged as a more potent competitive threat. However, non-banks are generally perceived as a source of quick credit for companies willing to pay at least some premium. Indeed, “attractive terms and conditions” rank as the No. 1 reason given by companies for using a non-bank in 2015. However, close to half of non-bank borrowers say they were attracted to non-bank providers by “attractive rates and pricing.” That share is up from 42% in 2014.

“There is still a perception that companies borrowing from non-banks are doing so because other banks won’t provide them with credit,” says Greenwich Associates consultant Dana Schwaeber. “While some companies certainly do turn to alternative providers after being turned down by traditional banks, non-bank providers are widely viewed as being easier to work with than traditional banks, and our study results suggest they are becoming increasingly competitive in price.”

The most popular types of non-bank lenders among companies in the Market Pulse are specialty finance leasing companies including OEM financing, which were used by one-third of the non-bank borrowers. About a quarter borrowed from special-purpose entities, including business development companies and hedge funds, and about 1 in 5 raised capital through private placements or private loans.

Established alternative asset management firms such as Apollo Global Management, Marathon Asset Management, Oaktree Capital Group LLC and KKR & Co.  are already operating as lenders. Franklin Square Capital Partners has publicly-quoted vehicles in direct lending. There are new entrants, like Firebreak Capital coming in, that see exploitable margin, even as loan pricing tightens.

Direct lending is not confined to the United States – in Europe there are 40 funds conducting direct lending, and last year volume was up 43%.  Well-known European hedge fund names such as Cheyne Capital and Chenavari Investment Managers are involved in various types of financing such as senior debt, mezzanine financing and asset-backed or collateralized loans.  The European arms of American hedge fund groups, a rapidly growing sector,  are keen participants in this type of lending. For example Avenue Capital in Europe  has been involved in providing  unitranche acquisition facilities and revolving credit lines in sectors it knows well.

Direct lending and other forms of alternative financing are also growing in Asia. Hong Kong-based Evenstar Capital Management successfully lends to SMEs in mainland China, taking equity kickers and other deal enhancements  in many of its unique deals. Hong Kong-based hedge fund Tor Investment Management operates in so-called “situational financing,” extending short-term private loans to medium-size companies for percentage returns in the teens. Like in Europe, large American alternative credit groups are also active from their regional hubs in Hong Kong and Singapore in direct lending strategies.




*The Greenwich Market Pulse is an ongoing research series that addresses the most important and timely issues facing small ($1mm-$10mm) and mid-sized ($10mm-$500mm) company owners/ executives and their banking relationships. The current studies were conducted in Q2 2015 with participation from 218 companies interviewed in May and June 2015 representing 103 small businesses and 115 mid-sized companies.