July 6, 2015
Private lending opportunities to remain robust
U.S.--The U.S. economic environment continues to be ideal for asset-backed lending, according to a new research report from Old Hill Partners Inc.
In its 2015 midyear update, Old Hill Partners' CEO John Howe notes the private lending space continues to be characterized by a strong economic foundation, low default rates, high collateral values and the ongoing departure of traditional lenders from the illiquid credit markets.
Meanwhile, extended equity and fixed-income markets, not to mention volatility around geopolitical issues such as Greece, have heightened the attractiveness of well-constructed asset-backed lending transactions and the significant yield pickup they can deliver when properly managed.
"The current opportunity in direct lending is very much a product of the strong macroeconomic environment, growing institutional interest, and regulatory hurdles placed on traditional lenders," writes Howe. "It will remain strong through the end of this year and well into 2016, as alternative lenders continue to fill the void created by strong demand for growth capital by businesses on one hand and reluctance on the part of banks to meet it on the other."
The report also examines the impact of potential Federal Reserve interest rate hikes on the private lending industry, and concludes that although timing remains hotly debated among economists, the data does not support significant tightening. "Any Fed move this year will be one of convenience, not necessity, and won't significantly affect corporate capital costs," added Howe. "Rates would need to rise 200-300 basis points higher in order to impact the private debt market, and that's not going to happen quickly."
Old Hill's update also notes that not all private lenders -- or their transactions -- are created equal. Wide differences exist in the quality of both issuers and lenders, the report contends, with issuer due diligence, verification of collateral, and creative transaction structures being the linchpins on which prudent asset backed lending relies.
"Above all else, consistent success in this business requires a sound, disciplined and repeatable investment process anchored on risk mitigation," writes Howe." It's a philosophy ingrained in Old Hill Partners since our founding in 1996."