The buy side, led by big institutional investors and alternative investment firms, should continue to displace banks as lead players in financing global economic growth, according to James “Jes” Staley, a managing partner at BlueMountain Capital Management LLC.
Speaking at the Skybridge Alternatives Conference in Singapore last week, Mr. Staley, who joined the New York-based, credit-focused alternatives firm in January after 34 years with J.P. Morgan Chase & Co., said heightened capital controls and liquidity requirements are forcing banks now to cede their dominance in that area.
From the 1930s through 2008, “the contribution of banks to economic growth” rested on an inherently unstable foundation: providing liquidity to savers while funneling their savings to non-liquid loans, with various government guarantees needed to ensure confidence in the system, Mr. Staley said.
Banks are in the process of being “squeezed out of that role,” with hedge funds, private equity firms and institutional investors stepping in to fill the gap in financing economic growth in developed markets and emerging markets alike, Mr. Staley said.
One sign of that shift: The amount of investment-grade corporate bonds and high-yield debt has more than tripled since 2000, while inventories of debt on bank balance sheets have declined over the same period, Mr. Staley said.
The new environment is increasingly marked by a concentration of savings — with the rise of bulge bracket sovereign wealth funds and pension funds in the U.S., Canada, Middle East and Asia, Mr. Staley said.
Those players, in turn, are opting to deal with a limited number of institutional alternative firms, rather than risk getting market returns by extending mandates to a larger number of providers, he said.
In this environment, Mr. Staley argued that firms focused on less-transparent credit markets have room to generate alpha from pricing inefficiencies.
Mr. Staley said BlueMountain's assets under management have jumped to $17 billion from $12 billion since he joined the firm seven months ago, with investors' growing focus on anticipated changes in the interest-rate environment a possible factor behind that increase.
That interest-rate uncertainty might be prompting asset owners to “look anew at relative value credit, to get exposure to credit with less interest-rate risk,” he said in an interview during the Skybridge conference.
Credit, meanwhile, is one market segment where size can provide advantages, Mr. Staley said. For example, if a bank is looking to sell a large book of credit card receivables, “and you can buy the whole thing … you can influence” the terms of that sale, he said.
Another encouraging sign Mr. Staley cited is “the number of investors willing to increase the lockups of their capital” in search of higher returns, providing long-term investment opportunities.