Hedge fund firms and other alternative asset managers are increasingly financing the economy, says an Alternative Investment Management Association (AIMA) paper.
The most popular borrowers of non-bank private debt are small and medium-sized enterprises, AIMA finds. These companies are typically too small to raise capital through the public corporate bond market, and have been finding it difficult to borrow from the traditional banking sector since the crisis. Refinancing existing loans, pursuing acquisition and expansion plans, and improving working capital are all common uses of private finance.
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Private debt funds, such as hedge funds, manage around $440 billion in assets worldwide.
The sector still predominately comprises American funds, but European and Asian funds have grown significantly since the financial crisis, the paper says.
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The AIMA paper also finds that private debt funds typically use little or no leverage, and are structured in a way to prevent bank-style runs or other systemic problems.
“Non-bank private debt financing, as distinguished from public corporate debt markets, has grown dramatically in popularity and volume in recent years,” says Stuart Fiertz, chair of the AIMA committee that produced the report, and President of Cheyne Capital. “Buoyed by both increased demand from investors as well as a growing appetite from businesses for alternative sources of funding, these markets are starting to have a noticeable impact on economic activity.”