Hedge Funds Expand in Primary Lending

Forbes- Hedge funds are increasingly positioning themselves as direct lenders to companies that are having trouble borrowing money from banks or through the bond market.

These investors aren’t strangers to the world of lending, and they’re preparing to play a bigger role by capitalizing on the wave of risk aversion that has swept global markets this summer. Banks are shying away from lending to riskier corporate clients and struggling to find buyers for hundreds of billions of dollars in debt stemming from the leveraged-buyout boom, opening the door for hedge funds and some private equity firms to fill the void.

Among the debt such firms hope to add to their books are the leveraged-buyout, or LBO, loans that traditional buyers are shunning. Some hedge funds, such as Oaktree Capital Management, are looking to purchase so-called hung bridge loans from banks. And other funds are working with private equity firms to directly finance planned corporate buyouts or are extending credit to struggling companies.

“Hedge funds have really grown up,” said John Wilson, a partner with law firm Foley & Lardner, who has a client that’s asking hedge funds to finance a planned LBO after bank funding dried up. “They’re out there in all facets and circumstances, and here they’re becoming an alternative lender.”