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The labeling of high interest rates as “transitory” was the only temporary aspect about them. Capital intermediation is adapting, forging unusual alliances in the process. PacWest Bancorp recently made headlines by selling a $2.3 billion loan portfolio to Ares Management for around 90 cents on the dollar, with partial financing from Barclays.
Ares, known for managing $360 billion, ranks among the largest private fund managers worldwide. PacWest, a regional bank in the US, has faced significant challenges with fleeing customers and the need to secure liquidity through borrowing at high rates. To attract deposits on a large scale, PacWest must offer higher interest rates. In response, the bank has decided to refocus its efforts, leaving fringe assets for players like Ares.
Barclays is providing financing to Ares, enabling the purchase of these loans. This suggests that private asset managers have not rendered banks completely obsolete. However, the scale and types of credit they generate are undergoing transformation.
PacWest was once fueled by corporate lending, experiencing a remarkable increase in its share price from $15 to $50 between 2009 and 2021, thanks to low-cost deposits. Now, the bank is divesting loans backed by various “accounts receivable” and has recently sold a multibillion-dollar construction loan portfolio. PacWest aims to shift its focus towards becoming a community bank and intends to use the proceeds from asset sales to pay off its expensive debts.
Ares operates various credit funds with target returns ranging from 5 to 15 percent. Some of these funds may employ moderate leverage. Regardless, securing borrowings incurs additional costs due to the need to align asset and liability durations.
Large, heavily regulated banks like Barclays remain prime lenders, as they prefer credit types that involve less underwriting compared to funds like Ares. Private capital managers, like rebels collaborating with the establishment, are discovering the benefits of doing business with established financial institutions.
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