By Ketki Saxena
Investing.com – The global banking industry has recently been in a state of high turmoil - unintentionally proving to be a boon for private equity investors and managers worldwide.
Private equity investments include both equity and credit backed by limited partners' capital managed by general partners or fund managers who provide debt or equity mostly to unlisted, private companies. This broad definition excludes hedge funds that focus mainly on public stock markets instead of private companies.
With regulators around the world providing reassurance that further bank runs will be stemmed and bank shares showing sustained rise off lows, effective containment of today’s banking turmoil seems more than likely.
However, the concern is that possible real-time run-on bank deposits made possible technological advances (and which stemmed such crises such as SVB, Signature Bank, First Republic and Credit Suisse (SIX:CSGN)) could lead banks to cut back further on their leverage hence reducing their lending capacity.
This growing problem is likely to be compounded by new regulatory constraints introduced after the sector’s recent troubles leading to increased cautiousness among banks. For example, in Global Financial Crisis 15 years ago when new global regulations led to disintermediation for smaller firms that have always been the sweet spot of private equity funding.
Reflecting this opportunity for private equity investment during original banking pullback periods; Triago (a leading PE advisory) estimates that the industry's total assets grew four-fold from $2 trillion in 2010 to $8 trillion today.
Preqin data provider reports that the smaller private credit market increased 35-fold over the same period reaching $1.4 trillion.
Looking ahead, Preqin had forecast 64% expansion over five years through 2027 for private credit growth. However, these forecasts are likely to be updated as loan market pressures lead more companies to seek equity funding in the form of venture, growth and buyout capital.
Increased bank caution combined with heightened economic uncertainty and a desire to invest in identifiable assets rather than traditional blind-pool private equity funds should reinforce direct private equity investment from groups that have historically invested mostly in funds. This too should increase potential returns for investors.
Going forward, this round of upheaval in the banking sector will prove a catalyst for private equity growth - as it has historically been.