When it comes to risk, these days banks have more to fear from private equity funds than from hedge funds. So says analyst Kinner Lakhani at ABN Amro in a Reuters interview. Lakhani notes that years of low volatility in hedge funds have toned down HF borrowing to two to three times their assets, compared with 10 times their assts less than a decade ago – right around the time of the Long Term Capital Management collapse in 1998. On the other hand, private equity firms are borrowing more heavily as they acquire troubled companies with heavily leveraged loans, and if there should be a hike in interest rates and slowdown in growth, watch out. “The risk is,” says Lakhani,” if and when the cycle turns... private equity could turn into a big loss making business” – especially when one considers that leveraged loans account for almost 20% of global investment bank revenue. Meanwhile, banks with HF exposure are raking in the bucks – ABN Amro made $26 billion in fees from hedge fund-related activity last year – without the risks p.e. presents.
Speaking of private equity, all that borrowing not only is a risk for the banks, but for the funds themselves. “There’s a disaster waiting to come,” Joe Moulton of Alchemy Partners told attendees at a seminar in London. “A change in credit sentiments will have a very significant impact on returns without even there having to be a large increase in interest rates,” Guy Eastman of SVG Capital told the audience. Some say a boost of just a half point can have a major negative effect.