“The private equity sector generates higher returns than the traditional loan market” (New York Stock Exchange)
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Speculators are not afraid of any risk. Because ordinary banking does not generate enough returns, investors are drawn to the world of shadow banking. The “private credit market” is booming. Private equity funds are longing for cheap loans to finance company takeovers. The rating agency Moody’s puts the traded volume at one trillion dollars. But the onslaught could come to an abrupt end. Moody’s warns of “systemic risks” in the industry.
Because the funds do not have a banking license, they are hardly subject to government regulations. Only God knows whether loans can be repaid. And as long as the financial sharks trust each other, private equity managers can continue to build the debt towers. The authors of the study write that the money flows into the “private markets” just like that Financial Times reported on Tuesday. The demand for loans from shadow banks, in which investment funds give tailor-made loans with high returns to medium-sized companies, is particularly high. “Risks that rise outside the limelight of public investors and regulators can be difficult to quantify, even if they have wider economic consequences,” the report said. The venture capital companies use “leverage” by charging new debt to companies they own and using the money to pay high dividends. So-called dividend recapitalizations have become a feature of the credit market in the last few weeks and have “rang the alarm bells” as they represent a further risk to the already high level of debt, poor investor protection and the economic uncertainty in the wake of the corona pandemic.
In September, around 24 percent of the funds raised in the US credit market were used to fund dividends to private equity holders, compared with an average of less than four percent over the past two years. Moody’s managers are concerned that the level of indebtedness is increasing, particularly among smaller companies. “Right now that’s okay because interest rates are low, but it brings a higher degree of risk for the future,” it said.
For Joscha Wullweber, the boom in the industry is obvious: “In the private equity sector, higher returns can be achieved than in the traditional loan market,” said the economist and author of the book “Zentralbankkapitalismus” at the University of Witten / Herdecke jW. The “radical belief in the free market” had led to enormous deregulations since the 1980s, which enabled the emergence and expansion of the shadow banking system. That started a redistribution of wealth to the richest ten percent. The door and gate are opened to speculation: »Only a fraction of this wealth is invested in the productive economy. The largest share ends up on the global financial markets, ”said Wullweber. In addition, the leading central banks have relied on the shadow banking system as a transmission channel for their monetary policy and thus strengthened it. The current loose monetary policy is leading to asset price inflation. It should also not be underestimated that more and more people are taking out private retirement provision. “This saved assets, which have to be invested in the financial markets through pension funds, is therefore also increasing,” said Wullweber. In this situation »the economy is weakening in many parts of the world. Instead of investing, the corporations prefer to withhold their money, which in the end also ends up in the financial markets in one way or another. “
Allison Lee, the head of the US Securities and Exchange Commission, is now also worried about the amount of money. At the beginning of October she pointed out that the growth of private capital was making large parts of the US economy “disappear in the dark” and becoming increasingly obscure not only for investors but also for regulators and policymakers. Lee said it was high time the SEC took action again and helped contain the increasing darkness. “What happens in the capital markets does not stay in the capital markets,” she warned. The cracks on Wall Street could spread across the country and the lives of all US citizens could be turned upside down.
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