Clifford Chance
Investment Funds: Lifeboats in a sea of change
29 November 2011
The funds sector can become an important source of much-needed direct lending to corporate borrowers, providing regulators find the right balance in how they regulate this potentially valuable channel of alternative debt financing.
The funds sector, which collectively represents a large pool of capital, is particularly well-placed to pick up any shortfall left by banks in the supply of corporate credit as banks continue to concentrate on addressing the liquidity and capital requirements imposed on them by regulations such as Basel III.
In particular, private equity and hedge funds are likely to be leading players in any significant participation among investment funds in corporate lending. The diversity of their specialist knowledge and the broad range of their strategic objectives will allow them to be flexible and adaptable in dealing with a wide variety of borrowers.
However, the prospect of investment funds becoming significant providers of direct lending to business may be severely hampered if regulators opt to impose an excessive level of regulation on them.
The sector is already facing strict new regulatory regimes such as the Alternative Fund Managers Directive (AIFMD) in the European Union and the Dodd-Frank Act in the USA.
Regulators need to ensure that the cost of regulatory compliance does not make it prohibitively difficult and expensive for investment funds to provide direct financing to business.
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Investment Funds: Lifeboats in a sea of change
