Asset managers turn to shadow banking

Many big fund managers are looking at big-ticket funding opportunities

Gulf News

Since the financial crisis, many banks have scaled back their traditional lending programmes in direct loans, commercial mortgage lending, social housing, property and infrastructure because of capital constraints and regulations.

And as they have done so, the asset managers have started to fill the void in what has come to be known as the shadow banking sector, or non-banks doing the work of banks.

William Nicoll, head of non-bank lending operations at M&G Investments, says: “The withdrawal of the banks from lending has provided us with a great opportunity. This is a growing part of our business and should be very profitable for us.”

Ashley Goldblatt, head of real estate lending at L&G Investment Management, adds: “We see this as a tremendous opportunity. We opened our business in lending a year ago to take advantage of this opportunity.”

M&G prefers to call this type of lending bank replacement finance, which it adds is not only an opportunity but also should aid the economy as companies that need loans for expansion can in theory still find them.

M&G Investments raised just under £1.5 billion in a couple of rounds for its UK Companies Financing Fund, from mainly third party UK pension schemes. The fund closed last summer having invested £930 million of that money.

L&G also sees this as a plus not just for itself but for companies and the broader economy, too.

It has made new appointments and signed deals this year as its business is starting to flourish.

In January it announced a new £120 million, 10-year debt facility to Bruntwood, the Manchester-based, family-owned commercial property company that owns and manages more than 100 UK office buildings, and has a number of other deals in the pipeline.

Other groups such as BlackRock, the world’s biggest manager of money, and Allianz Global Investors have started to develop operations in the infrastructure debt market.

AllianzGI plans to launch debt funds for infrastructure projects in the UK and Europe in the coming weeks, which will go towards the expansion of roads, the building of schools and hospital renovations.

Elsewhere, funds such as BlueBay Asset Management are pushing into corporate lending.

It plans to offer direct loans to small and medium-sized enterprises in the UK and northern Europe.

However, it is not as simple as asset managers replacing banks.

As Goldblatt says banks have traditional distribution and networks and years of experience in lending, while asset managers are new to the game, which means it will take time for many to build up their offices and networks.

Some asset managers do not have the skills and experience to assess companies, particularly smaller and more obscure corporates. Others say they are reluctant to offer big loans because of the risks to their balance sheet.

However, one sector that is growing fast and become increasingly popular for a raft of asset managers is commercial real estate.

BlackRock, Schroders, Axa, Allianz, M&G and L&G are all moving into the property space.

The motivation for these managers is simple. Direct lending often offers high yields, or at least much higher than the historically low yields in the government bond markets, which have put pressure on pension deficits.

One asset manager at a big UK institution says the move into real estate is about value as well as diversification away from corporate bonds. A real estate loan can offer yields of up to 11 per cent, a very big pick-up over government bonds, which offer about 2 per cent or even investment grade corporate bonds that offer about 4 per cent.

Fees are also higher with a 3 per cent margin on a deal relatively common.

L&G moved into property lending last year. It provided Unite, the UK’s largest developer and manager of student housing by units, with a £121 million loan in April.

However, completing some deals is tricky as they can take time and due diligence and management can throw up problems.

It means that only the big asset managers are able to take advantage of the withdrawal of the banks. Shadow banking is not a market for the smaller players, meaning many companies are still struggling to get loans they once easily accessed from the banks.