Owning It: Small Business

For small biz, hedge funds are the new banks

Leon Black
Source: The Milken Institute

Investor Leon Black, like many peers, has urged caution given high market valuations. But the Apollo Global Management CEO said his $163 billion firm is rapidly expanding one of its business lines: lending money.

"Credit in general is a huge, huge opportunity today," Black said last week at the Milken Institute Global Conference in Los Angeles, noting the diminished role of banks in providing loans.

Black's Apollo is one of many investors to see the opportunity.

A new paper from the Alternative Investment Management Association, a London-based hedge fund lobbyist, estimates that private debt funds—including hedge and private equity funds, among others—now manage about $440 billion globally, with $64 billion of new capital allocated to the sector last year alone, per Preqin data.

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The surge in activity from private lenders, according to AIMA, is a boon for smaller companies.

"Many small and medium sized businesses would miss out on growth opportunities or fail altogether if it were not for the absolutely vital support of hedge funds and other alternative asset managers," AIMA CEO Jack Inglis said in a statement.

Hedge funds and others in the space usually provide loans of between $25 million and $100 million, often for periods of one to three years, according to AIMA's survey. About 65 percent of companies taking the loans typically have earnings before interest, tax, depreciation and amortization of between $5 million and $75 million.

The report notes that the companies lent to are typically too small to raise capital through the public bond market and banks have been more reluctant to lend to them because of stricter standards following the 2008 financial crisis.

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The most popular sectors for lending are consumer goods and services, healthcare, industrial, and real estate, according to AIMA's survey of private fund managers.

Examples of recent loans from U.S. firms given by AIMA include private equity shop KKR & Co giving an approximate $12 million loan to help grow a Scottish wind farm; a $26 million loan from hedge fund firm Pine River Capital to an American aircraft parts dealer for purchasing a target company; and Avenue Capital, another hedge fund manager, lending money to investment firm H.I.G. Europe to help it buy consumer loan broker Freedom Finance Nordic.

Another benefit of the private lending, according to AIMA, is systemic: instead of a few big banks, there are lots of funds to share the risk, and the funds use relatively little borrowed money to amplify their bets, so-called leverage.

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