Speaking at the REC New York Forum, two leading private debt professionals highlighted how regulation has heavily constrained the banks and allowed firms such as theirs to move in and fill the financing gap – as well as lure away key professionals.
Mike Nash, senior managing director and global head of Blackstone Real Estate Debt Strategies (BREDS), said that – having previously held several roles in the banking environment – he was well aware that banks were experiencing some “pretty dramatic mood swings” due to more punitive regulation, impacting their ability to maintain a consistent strategic approach.
Speaking confidently of prospects for firms such as his, he said: “Our birthday in this business was post-Crisis and it’s hard to raise capital and scale that capital in the way that we’ve been able to do. We’re here, we’re scaled up, and we’ve got a strong brand supporting us.”
Nash also drew attention to how the growth of private debt providers is being given momentum by a flight of professionals away from the banks, citing his own departure from Merrill Lynch as one example. More recently, Blackstone hired of Jonathan Pollack from Deutsche Bank in June of this year as BREDS’ chief investment officer. He described Pollack as a “bright light” in the industry.
He went on to say: “it’s not just Jonathan. Lots of people are moving to private capital. Everyone wants the path of least resistance when they are doing transactions. It’s exhausting to focus on all the other stuff [such as regulation] – it’s a burden and it’s not value-add.”
Despite the banks’ travails creating opportunity, however, the effect on liquidity of traditional lenders pulling back is seen as a downside. “We want the banks to be strong, liquid and credible – that’s in our interest,” said Nash. “Liquidity, transparency and a willingness to lend in tough markets are good things. It’s a bad thing when people are unwilling to commit capital and liquidity dries up.”
Jeffrey DiModica, president of Starwood Property Trust, the largest commercial mortgage REIT in the US, shared the platform with Nash. He too felt the waning influence of banking and other traditional lenders was a negative factor. GE Capital, for example, exited commercial real estate lending this year in part because regulators in 2013 had deemed it a systemically important financial institution (SIFI), exposing it to the same regulations as the large banks.
“It was a shame to lose GE from the market,” DiModica said, referring to the firm’s decision earlier this year to exit commercial real estate lending. “They were a good competitor and their withdrawal was an unintended consequence [of regulation]. It’s also an unintended consequence for the banks to be lending less.”
DiModica rejected the notion that banking regulations should also be applied to the private debt providers. “The government never has to come in and bail us out,” he asserted. “Bad decisions are reflected in our share price.”
As part of the same panel discussion, Nash called for a small rise in interest rates. “I think rates should go up as it would express confidence in the market. Personally I would have moved them up in September, but they will probably move in December. But global growth is slow, so rates won’t be sky-rocketing any time soon.”