The Journal reports today that the banks who are underwriting the loans Elon Musk will use to acquire Twitter plan to hold the debt on their balance sheets because in the rising interest rate environment they can't be sold profitably. Normally they would sell the loans on to mutual- and hedge-fund managers, but they don't want them. Because of this, the leverage buy out community is increasingly looking to private credit (and also private equity) firms like Blackstone and its peers to find funding for deals.
Perhaps not coincidentally, the Blackstones of the world are increasingly reaching out to the retail investment advisory world (people like me) as a source of funds. Time was, we and our clients were too small for it to make business sense for them to come after us (the sales, marketing, administrative and compliance expenses ratchet up as you go after more and smaller chunks of money), and for the most part I think we still are.
What the big private equity firms are counting on is that the prestige of their names will excite affluent people from the suburbs. The bluster and status of standing around the grill talking about the deals one has going with Apollo or KKR is just catnip for some guys.
I don't like it. Disintermediation serves a useful purpose here. If Fidelity and T Rowe Price don't want to buy it, I don't either, and taking away layers of due diligence between risky debt and main street investors serves the latter well, though it does impose costs. If the challenge of accessing other people's money to do deals slows down dealmakers in a rising rate environment, so be it. Let them use more cash and/or stock. People should hesitate before borrowing money to do things. Higher interest rates help us do that.
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