Further bank restrictions could benefit GPs

US regulators are preparing to issue further restrictions on bank lending activity, which has reached record highs in recent months, in a move which has brought lobbyists from the alternative investment community to the fore.

The Private Equity Growth Capital Council (PEGCC), a private equity lobbying group, met with the Office of the Comptroller of Currency at the Federal Reserve Bank last week to voice concerns that further restrictions might be extended to credit funds, and also negatively affect their ability to finance buyouts, Reuters reported.

But the OCC officials allayed the private equity managers’ fears and said they weren’t looking to curtail private equity activities, sources told Reuters. This was the first meeting of its kind between the private equity lobbying group and the OCC. The OCC and Federal Reserve Bank don’t regulate the private equity industry, although the Securities and Exchange Commission does. A few of the PEGCC members, including the Blackstone Group, Apollo Global Management, KKR and TPG, have direct lending divisions and could benefit from the void left by banks.

In a paper published by Moody’s on Tuesday, the ratings agency said bank regulators were likely to enforce stricter disciplines in this summer’s Shared National Credit (SNC) review of syndicated loans. “If regulatory enforcement leads to tighter bank-lending standards, it would prevent some companies from borrowing to fund aggressive transactions, such as shareholder distributions, that would drive their leverage higher and increase future default risk,” the paper said.

Regulators are worried that banks have not been following new rules when it comes to lending as closely as they should have, and have increased their risk appetite too much in recent years in a search for yield as economic conditions have improved.

While private equity firms with credit arms stand to gain from the leveraged loan activity that banks would have to shed, it could also create its own host of problems. “Should non-bank lenders seek to fill a void left by regulated banks, it would likely lead to deterioration in underwriting standards outside of regulators’ reach,” the Moody’s report said. It later added that covenant-lite loans are already becoming more prominent in the private debt space and could become even more the case after further bank regulation.