A few months ago, if you asked where the next financial crisis could come from, most people probably wouldn’t have said local banks. Rather, they may have speculated on the shadow banking sector, which has grown dramatically since the 2008 global financial crisis. It remains much less regulated than the traditional banking sector.
When the pandemic hit, non-banks such as hedge funds and open-ended money market funds pulled out of major credit markets, forcing the government to intervene to stabilize things. Treasury Secretary Janet Yellen As I said in my speech last week, “simply put, the corona shock has reaffirmed the importance of nonbank structural vulnerabilities”. We monitored and pointed out the many ways they are trying to address the liquidity mismatch in open-ended funds and the money market. These can “make big bucks” under pressure, resulting in big losses for smaller investors.
It’s good that policymakers are focusing on shadow banking, because I’m still convinced there’s a real link in risk for 2023 and beyond.
Consider, for example, the problems experienced with commercial real estate loans and private equity real estate funds. This is where the stories of Shadow Bank and Tiny Bank meet. Smaller banks hold his 70% of all commercial real estate loans, and that growth has more than tripled since 2021. Smaller financial institutions are also increasing their investment in riskier private equity-owned assets following the relaxation of the Dodd-Frank Act on community banks. Hedge funds (as well as other institutions looking for better returns, such as pension funds).
Small bank funding for commercial real estate is currently tightening. This, along with rising interest rates, is putting downward pressure on commercial real estate values, which are currently below pre-pandemic levels. This will curb the flow of capital, derail investments, and put pressure on private his equity funds that need to have loans mature or inject stock.
As the recent TS Lombard Notes suggested, we expect high levels of real estate debt maturities in 2023. This means asset managers may be forced to go to investors for more money (which will be a tough bargain at this point).
This feels like a loop of fate to me. Major real estate indices had already turned negative for him in 2022.Last month, Canadian real estate group Brookfield stopped paying There is also growing short-selling interest in real estate investment trusts such as Hudson Pacific Properties and Bornado Realty. Concerns about commercial real estate may begin to reveal other vulnerabilities, or at least asymmetries, especially in the financial system and shadow banks.
Consider, for example, how non-bank asset managers such as Blackstone, Apollo and Carlyle have gotten richer in both residential and commercial real estate since 2008. is. Private equity players are making new investments in utilities, farmland, transportation, and energy (particularly renewables, driven by government pushes to transition to clean energy).
I’m not saying these institutions are going bankrupt any time soon. Quite the opposite, major private equity firms are flooded with cash. Data provider Preqin says he generally has 18 months’ worth of shares in reserves in real estate funds, which, as TS Lombard points out, can dry up when returns decline. I have. But it’s safe to say that the combination of declining values, rising interest rates, and a credit crunch will likely result in high-profile defaults. Perhaps more importantly, the private equity and global asset management business in general of the past few years is about to kick off.
This month, political economist Brett Christophers said: Our Life in Portfolios: Why Asset Managers Own the WorldHe believes we’ve moved from financialized capitalism to something more insidious — a wealth management society where financial giants own “essential physical systems and frameworks” — we The homes where we live, the buildings where we work, our power systems illuminate our cities and the hospices where we die.
This is a process accelerated by post-corona fiscal stimulus in the United States and elsewhere, promoting public-private infrastructure partnerships. For example, the U.S. Infrastructure Investment and Jobs Act introduced many new concessions to private investment, although it provided less public investment than originally proposed.
The quote at the beginning of Christophers’ book is from Bruce Flatt, CEO of Brookfield Asset Management. No one knows we are there. ’ Well, no more. The issue of private equity in residential real estate has been well considered. With the commercial real estate crisis looming, learn more about the highly leveraged brick-and-mortar empires built by shadow banks and what risks privatization of such assets poses. may investigate.
