Bank lending activity is headed for a slowdown in the wake of tightening conditions that just claimed another US bank in First Republic. Leaders of major asset management firms discussed the prospect of a credit crunch at the 2023 Milken Global Conference. They shared how they’re planning to capitalize on the dislocations that arise. Several financial institutions have fallen in the last few months, and the culprit is clear: the tightening financial conditions that have resulted from the Federal Reserve’s interest-rate hikes.
Rising rates caught many industry players off-guard, most notably as Silicon Valley Bank collapsed in mid-March and amid the emergency sale of First Republic Bank this week. The tighter environment was top of mind during an economics panel at the 2023 Milken Global Conference, with multiple participants warning of an impending credit crunch.
“We’re going to see a real ratcheting up of regulation in the banking system, particularly on many of these regional lenders,” said David Hunt, the CEO of $1.4 trillion asset management firm PGIM. “That will be, at the end of the day, quite constraining on their capital base. And what that will do is further hinder the supply of credit.”
He continued: “We are going to see now a real slowing that begins to happen to aggregate demand because of the decrease in the supply of credit that’s coming in.”
Hunt said that no area of the investing landscape is more exposed at the moment than real estate.
The following Milken speaker, Rishi Kapoor — co-CEO of Investcorp, which has $50 billion in assets under management — also highlighted the vulnerability of real estate, and seconded Hunt’s concerns about tighter lending standards.
Rishi Kapoor, co-CEO of Investcorp. Patrick T. Fallon/AFP via Getty Images “No doubt that the second- and third-order effect of the banking sector fallout in the US, in particular, is going to cause a constraining of financial conditions and lending,” Kapoor said. “The commercial real estate sector in particular, which was 50%-plus from the regional banking system, is definitely going to be limited.”
But while commercial real estate is vulnerable right now, Kapoor said that the residential space can thrive in an inflationary environment, because upward rent adjustments can be made more regularly to keep pace.
“What we are finding in our own portfolio is that the rental increase that we see and they increase in net operating is actually more than offsetting the cost of tech service,” Kapoor said. “As long as you have the right financing structure in place with the right tenor attached to it, you can actually ride out this period for some period of time — focusing on operational improvements, rental increases, and then try and capture a better cap rate on the way out with the hopefully lower-interest-rate market.”
Hunt also discussed how PGIM is planning to react to a credit crunch: by continuing as normal and trying to absorb more market share from traditional banks. He noted that private lenders like PGIM were already taking share from banks even before the recent turmoil, and that he expects the shift to continue.
“That is only going to accelerate now with these failures and the rise in the real regulation on many of these regional banks,” Hunt said.”