The recent outcome of the U.S. elections brought a change in attitude toward regulations and monetary policies.
A Trump presidency suggests a meaningful reduction in certain regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, among others. He also has provided a clear signal that the U.S. will end its accommodative monetary policy.
One wonders, therefore, what impact the new administration will have on direct lending activity in the United States.
The 2008-'09 global financial crisis and ensuing low-rate environment drove prices of traditional fixed-income assets to historic highs and corresponding yields to historic lows. Meanwhile, structural regulatory changes accelerated the multidecade trend of traditional capital providers retreating from the market. Together, these forces have created greater opportunity for private capital providers to fill a massive credit funding gap and charge a premium for doing so.
Banks in the U.S. (and around the world) have faced significant regulatory pressure stemming from the global financial crisis; risk-based capital charges for non-rated loans and Tier 1 capital ratio increases made it increasingly challenging for banks to provide loans to small- and middle-market companies. Whereas commercial bank deposits have increased substantially since 2011, the pace of growth for loans and leases has been much slower. Therefore, direct lending investment managers and business development companies emerged as a structural replacement for banks in the viewpoint of borrowers.