How Private Equity Fuels Non-Bank Lending
FinanceandEconomicsDiscussionSeries FederalReserveBoard,Washington,D.C.ISSN1936-2854(Print) ISSN2767-3898(Online) HowPrivateEquityFuelsNon-BankLending SharjilHaque,SimonMayer,TengWang2024-015 Pleasecitethispaperas: Haque,Sharjil,SimonMayer,andTengWang(2024).“HowPrivateEquityFuelsNon-BankLending,”FinanceandEconomicsDiscussionSeries2024-015.Washington:BoardofGovernorsoftheFederalReserveSystem,https://doi.org/10.17016/FEDS.2024.015. NOTE:StaffworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstaffortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers. HowPrivateEquityFuelsNon-BankLending∗ SharjilHaque†SimonMayer‡TengWang§January26,2024 Abstract Weshowhowprivateequity(PE)buyoutsfuelloansalesandnon-bankparticipa-tionintheU.S.syndicatedloanmarket.Combiningloan-leveldatafromtheSharedNationalCreditregisterwithbuyoutdealsfromPitchbook,wefindthatPE-backedloansfeaturelowerbankmonitoring,lowerloansharesretainedbytheleadbank,andmoreloansalestonon-bankfinancialintermediaries.ForPE-backedloans,thespon-sor’sreputationandthestrengthofitsrelationshipwiththeleadbankfurtherreducetheleadbank’sretainedshareandmonitoring.OurresultssuggestthatPEsponsorengagementsubstitutesforbankmonitoring,allowingbankstoretainlessskin-in-thegameintheloanstheyoriginateandtosellgreaterloansharestonon-banks. Keywords:SyndicatedLoans;PrivateEquity;LBO;BankMonitoring;CLO;Securi-tization;LoanSales JELCodes:G00;G10;G30;G32;G33; ∗TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheFederalReserveBoardortheFederalReserveSystem.WeareespeciallygratefultoJohanCassel,QuirinFleckenstein,IvanIvanov,andRalfMeisenzahlfordetailedcomments.WewouldliketothankFernandoAvalos,BrunoBiais,YongqiangChu,HansDegryse,JenniferDlugosz,SebastianDoerr,MatthiasEfing,AndrewEllul,FiorelladeFiore,ThierryFoucault,LeonardoGambacorta,SebastianGryglewicz,SebastianHillenbrand,JohanHombert,C´edricHuylebroek,JessicaJeffers,MarcinKacperczyk,JohnKrainer,DavidMauer,DanielNeuhann,JacquesOlivier,StevenOngena,SophieRotermund,FarzadSaidi,AntoinetteSchoar,LukasSchmid,Hyun-SongShin,ChesterSpatt,JaredStanfield,AnnetteVissing-Jørgensen,MikeWeisbach,andKairongXiaoaswellasseminarandconferenceparticipantsattheFederalReserveSystemBankingConference,BIS,ParisDecemberFinanceMeeting2023,PERCConference2023,theFederalRe-serveBoard,KULeuven,andHECParisforusefulcommentsanddiscussions.WealsothankRobertCoteforguidanceontheSNCdataandJoeYukeforstellarresearchassistance. †BoardofGovernorsoftheFederalReserveSystem.Email:sharjil.m.haque@frb.gov ‡CarnegieMellonUniversity,TepperSchoolofBusiness.Email:simonmay@andrew.cmu.edu §BoardofGovernorsoftheFederalReserveSystem.Email:teng.wang@frb.gov Tworecentcapitalmarkettrendsaretheriseofprivateequity(PE)andleveragedbuyouts(LBOs),andthegrowingparticipationofnon-bankfinancialintermediaries(suchasCLOsorprivatedebtfunds)increditmarkets,notably,theU.S.syndicatedloanmarket.Thesetwotrendsarenaturallyrelated,asLBOdealsarefinancedtoalargeextentwithsyndicatedloans(ShivdasaniandWang,2011).Importantly,bothbanks(specifically,leadbanksinsyndicatedlending)andPEsponsorsareactiveintermediaries.PEsponsorsconductduediligence,engagewiththemanagement,andinitiateoperationalorcapitalstructurechangesintheirportfoliocompanies(KaplanandStromberg,2009).Banksscreenandmonitorborrowers(Gryglewicz,Mayer,andMorellec,2024),whileretainingashareoftheloanstheyoriginatetomaintainsufficientincentives(GortonandPennacchi,1995). Thispapershowsthataloan’sPEbackingsubstitutesforbankmonitoring,allowingbankstoretainlessskin-in-the-gameintheloanstheyoriginateandtosellgreaterloansharestonon-bankfinancialintermediaries.RelativetocomparablenonPE-backedloans,PE-backedloansfeature(i)lowerbankmonitoring,(ii)lowerloansharesretainedbyleadbanks,and(iii)largerloansharesheldbynon-bankfinancialintermediaries(e.g.,CLOsorprivatedebtfunds).ForPE-backedloans,boththereputationofthePEsponsorandthestrengthofitsrelationshipwiththeleadbankcausefurtherreductionsinmonitoringandloansharesretainedbytheleadbank.OurfindingssuggestthatPEsponsors’actionsandengagementwithportfoliocompaniesreducetheleadbank’s(perceived)expectedlosses,hencereducingthenecessityofbankmonitoring.Overall,PEbuyoutsappeartostimulatenon-bankparticipation,liquidity,andloansalesinthesyndicatedloanmarket. Forourempiricalanalysis,wecombineadministrativeloan-leveldatafromtheSharedNationalCredit(SNC)register,containingextensiveinformationaboutU.S.syndicatedloanswithaminimumcommitmentof$20Mn,withbuyoutdealsfromPitchbook,allowingustoidentifyPE-backedborrowersandloans.IntheSNCregister,theleadbank(orleadarranger)ofasyndicatedloanisrequiredtoreportdetailedinformationabouttheloan,includingloanownershipshares.Thus,ourcombineddataallowustoo
