Increased Banking regulation to benefit private debt solutions over traditional bank credit financing
The financing of the real economy in Europe has traditionally taken place through banks, which provide around 80% of the corporate financing. The situation is very different in the U.S. where only 20% of the financing to corporation originates from the banking sector, the rest being ensured by bond markets, insurance companies, pension funds and direct lending funds. The share of financing controlled by banks has been trending down continuously in the US since the 1950s, when it stood at a staggering 75%: this is a clear evidence that there is ample scope for increased reliance on capital markets in Europe.
Following the 2008 crisis, the trend is toward downsizing of banks. According to Royal Bank of Scotland, European banks will need to offload about EUR 3.2 tn of assets to comply with Basel III requirements. For 2013, bank loans made to non-financial companies fell by 4.3% in the Eurozone, triggering huge pressure on companies to find alternative ways of financing. The situation is becoming especially problematic in countries like Spain and Portugal, where SMEs – accounting for a significant share of GDP- find difficulties in accessing global debt markets.
Such an evolution of the banking sector creates huge opportunities for European borrowers and debt investors. Over the next five years, Standard & Poor’s forecasts that Europe will need USD 2 tn of new commercial debt to ensure a growing economy.
Although still in its early stage, the shift towards private debt in Europe brings diversification, as well as sources of higher returns to professional investors seeking alternative sources of yield, in the current environment of low interest rates.
At VRC, we are very active in structuring private debt solutions.