Loans for Small and Medium-Sized Companies Rapidly Expanding in the U.S. Seeking High Yield via a Fund Structure
by Momoe Ban – Nikkei Newspaper December 5th, 2019
Last month, PennantPark Founder and Managing Partner Art Penn discussed the growth of the private debt market in an interview with the Nikkei Asian Review, noting that Small and Medium Enterprises (SMEs) are seeking new opportunities for private debt to raise funds.
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The private debt (PD) market, which includes non-bank loans to small and medium-sized enterprises (SMEs), is rapidly expanding within US financial markets. Private debt (PD) and private equity (PE) funds are actively engaged in lending to SMEs, an area which became unprofitable for large commercial banks. The exchange-listed financial products that bundle PD, which provide opportunities for individual investors to invest in this area, are also expanding. In response to low-interest-rates globally, capital from investors seeking higher yields are flowing into these products.
“In the initial public offering (IPO) market, the hurdles for public listings are rising, and therefore, SMEs are seeking to raise capital from PD,” said Art Penn, founder of PennantPark, a leading middle market credit platform, specializing in PD funding in New York. With $3.8 billion in assets under management, the company’s core focus is providing directly originated, private equity-backed loans to SMEs.
PD has expanded rapidly among institutional investors in the last few years. According to Preqin, a U.S. research firm, PD raised $110 billion in 2018. It has surpassed $100 billion for four consecutive years since 2015. Previously, the last time PD exceeded $100 billion was just before the market was hit by the financial crisis in 2008.
Investors’ interest in private debt is driven by the higher interest rates / returns. According to the index by Cliffwater, a US financial services firm which collects data on 6,000 private debt deals, the yield averaged 10.62% for the past four quarters (as of the second quarter of 2019). Each calendar year, PD has outperformed the high yield index during recent years.
PennantPark’s senior focused funds seek an annualized net return of 7-12%. Of course, higher returns come with higher risk, and therefore, scrutiny of borrowers is essential. “We decline 96% of SME businesses that request loans, accepting only 4%,” Mr. Penn said. PennantPark targets companies with a high level of stable cash flows and focuses on a diverse set of industries such as software, IT (information technology) services, and healthcare, among many others.
According to Mr. Penn, the investment opportunities for PD are enormous, “We expect demand from Japanese institutional investors suffering from low-interest rates.”