Balance sheets, regulation and geography: The structure of strategy

April 29, 2015

photo of panel on capital structureDramatic changes in global banking regulations are transforming the capital markets in the United States and Europe, creating huge opportunities for firms willing to step into the chaos, according to some of the world’s leading investment managers.

Among the chief beneficiaries will be “guys like us in the shadow banking system— Apollo, Blackstone, Canyon” —who are “allowed to play where the big banks are not allowed to play,” said Mitchell Julis, co-founder, co-chairman and CEO of Canyon Partners, a global alternative asset management firm with approximately $24 billion in assets.

“Our job is to anticipate what the next change in the balance sheet is going to be,” Julis explained. “Shadow banking” refers to the alternative credit or non-bank financing sector, a $75 trillion pool.

Julis was a panelist at “The Art and Science of Capital Structure” panel during the Global Conference. Milken Institute Chairman Michael Milken moderated the lively discussion, which focused on how issues such as regulatory climate and social changes are reshaping corporate attitudes toward capital market structure and profit opportunities.

“We are fortunate to live in a time of all-time-high equity markets and all-time-low interest rates,” said Jonathan Sokoloff, managing partner of Leonard Green & Partners, a Los Angeles-based private equity firm. “It’s kind of a feast for those of us coming out of the ‘80s and ‘90s.”

Though the financial landscape has changed dramatically over the past few decades, some truisms remain, Milken reminded the audience. “The best time to finance is when you don’t need money,” he said. “The worst time is when you do need money.”

Europe dominated the discussion. Mark Attanasio, the co-founder and managing partner of Crescent Capital Group and primary owner of baseball’s Milwaukee Brewers, said his challenge was convincing investors of the opportunities in Europe, where his firm is “lending money at four times cash flow with a senior position at an average rate of 10 percent.” One of Crescent’s recent investments is a UK company that provides nursing services at clients’ homes and in hospitals.

Emanuel Friedman, CEO of EJF Capital, said new restrictions on the giant European banks that have traditionally dominated their home markets will force them out of key industries, creating a “desert” in the capital markets that firms like his are rushing to fill.

“There is great opportunity in doing one of two things,” he said. “Either finding companies that are already operating that are growing rapidly and have this unbelievable advantage against the banks” or “create those companies from the ground up with a strong operator.”

But Friedman reminded the audience that a shift in attitude among government regulators in the United States means upheaval for large financial players on this side of the Atlantic as well. That includes recent moves by bank regulators to require banks to shore up their capital buffers and the loosening of restrictions on lending and acquisitions for smaller banks. 

“When you think of a big bank in Europe or the United States, you should be thinking of Con Edison,” he said. “You should be thinking about a regulated utility.”

The wage environment is another factor these investors consider. Though the drop in the U.S. jobless rate and the campaign for minimum wage hikes have not led to widespread increases, Sokoloff said the executives he works with are looking for creative ways to cushion the potential impact on their bottom lines. That includes shifting a larger share of health-care costs to employees and expanding  automation throughout their enterprises.

“Businesses are very ingenious,” he said.