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We may be concerned about inflation and recession after the pandemic, but the equity sector has remained strong. Private equity (PE) big-ticket deals hit historic highs in 2021 as the US exceeds $1.2 trillion in private equity transactions. In any case, the burst of liquidity with trillions pumped into the economy through central bank monetary stimulus from March 2020 to stem global slowdowns fueled the excessive number of acquisitions and exits. 2022 could become even more important for the sector.
Private equity firms are increasingly choose to bypass banks completely in favor of direct loans or borrowing money from each other. Bain’s 2022 Global Private Equity Report found that the record private equity raked in $1.8 trillion in buyout capital in 2021. The size of the deals grew a few years ago to billions of PE mega-funds of just millions. PE firms are now seeking large leveraged buyouts — once the sole preserve of major Wall Street banks — through direct lending. With PE returns rising above other asset classes and growing popularity among pension funds and high net worth investors, it’s only a matter of time before private equity becomes mainstream across asset classes. Regulations and prevailing attitudes towards private equity are also likely to change significantly.
Related: A Beginner’s Guide to Private Equity
Direct loans are devouring the syndicated loan market
The regulatory changes following the 2008 financial crisis had already forced many banks to move away from Leveraged Buyout loans. Historically, slow processes have been the biggest problem for companies trying to get bank financing. Given the relatively large number of participants involved in obtaining such large loans and the fact that they could only be guaranteed in multiple tranches (senior debt, credit fund, public markets) in the syndicated loan market, the process was lengthy and time-consuming . This also made it harder for companies to keep deals quiet until they were ready to announce them.
In contrast, direct lending funds are much easier to obtain through unit ranch financingand the process can be a month or more shorter. Private equity is likely to become a much larger provider of capital, which means tremendous growth.
Related: Why the Private Equity Secondary Market Is Poised to Grow
Huge impact on banks; Tax standards can change
Leveraged finance, responsible for the lion’s share of the lucrative investment fees earned by Wall Street bankers from arranging megadeals, could very well see a downturn with direct lenders joining the fray. The latter can also provide borrowers with better leverage, as it has more leeway than the banks’ regulatory handcuffs. For example, some are scrapping borrower performance tests to compete with lighter covenants offered by banks. Banks may no longer charge lower interest rates to attract borrowers.
As large amounts of capital move from banks to private equity funds, this is likely to bring more scrutiny and taxation. Direct lenders are currently enjoying relatively less regulatory oversightbut there is likely to be a shift towards taxing private equity funds.
Related: Why Entrepreneurs Should Invest in Private Companies
Private equity has traditionally been a game for accredited investors with lots of money. But with more and more private equity firms go publicit is now possible for the average citizen to possibly take action for the first time.
With returns on fixed income near zero, capital pools are turning to private loans for higher returns. Any investor can now invest in the future of the company if they do not participate directly in the managed funds.
With the number of deals soaring, private credit is becoming a standalone product from the syndicated loan market. The future is not charted yet, but if private equity continues to fund millions of megadeals, as it has in the past, it will certainly be watched more closely by regulators and investors alike.
As public participation grows, private equity firms should also ensure transparency and clear processes. This in turn can influence whether or not private equity regulations are changed. Those involved in private equity are already aware and are using lobbying and other structural actions to accommodate the likely major shifts on the horizon.