In July, financial-services firm Citco Group of Cos announced a new business, Citco Capital Solutions, focused on arranging debt and equity capital for sponsors and investors in alternative assets. Leading the effort is Michael Peterson, formerly Citco’s head of capital markets.
“The reality of why we got into this business goes back many years, 10-plus years, at this point,” he said. The recent precipitating factor was the raft of post-crisis regulation, and the retreat it caused from “what used to be lendable asset classes that banks are frankly being punished for.” Peterson mentioned a study by the St. Louis Fed that found a $2.5 trillion lending gap in the U.S. in 2015; the situation in Europe is similar.
“From a risk-weighted-capital point of view,” between Dodd-Frank/Volcker and Basel III/CRD IV, banks “can’t lend into many of these assets the way they used to,” he said.
The growth of lending clubs is one consequence. Another is increased opportunity for non-bank facilitators of financing for fund managers. “Our clients have asked us for years, ‘can you introduce me to this guy or that guy who may be in a similar space and want to do a deal with me?’ We just decided to formalize the business,” Peterson said.
Citco works with lenders worldwide to help clients source deal flow or finance daily operations, filling spaces that in some cases U.S. and European banks are being regulated out of. “We get to see everyone from here to Asia and deal with them in a variety of situations,” he said.
As well as seeking alternative sources of capital, some managers are pursuing what Peterson called “a new strategy, just focused on the debt side of the equation”: becoming lenders themselves. “They recognize there’s a massive opportunity in the marketplace,” he said, referring to the multitrillion-dollar lending gap. “They don’t have to capture that much to be successful, frankly.”
Peterson spoke of one client, a middle-market fund manager with an established buyout track record, who wanted to move into direct lending. The client seeded a joint venture along with a partner and approached Citco for help with a rediscount facility, to increase their platform’s lending power.
“Even those facilities are hard to find these days,” he said. “We helped put together a warehouse line by running a process to find different lenders, soliciting capital from the U.S., Europe and Asia.” After getting a number of term sheets back, Citco helped the client pick a lender (from outside the U.S.), “structure and then close that loan, and then they’re up and running that business now.”