Access to capital is the lifeblood of any strong institution or country. For generations, business leaders have relied on traditional financial institutions to provide the necessary funding to launch, thrive, and create jobs that support families. Today, however, we are in an era in which the ability to access capital through traditional channels—i.e., bank loans or the public equity and debt markets—has decreased for many US companies, consumers, and small businesses.
In the aftermath of the Global Financial Crisis, the US banking system retreated from significant areas of corporate lending amid regulatory mandates to reduce risk and increase capital reserves. This exodus of capital providers disrupted the traditional means to access credit for many small and mid-sized companies and consumers. However, it also created an opportunity for non-bank capital providers such as asset managers—in partnership with asset owners—to develop broader private credit lending solutions in areas like corporate direct lending and asset-backed finance to step into the void.
Asset managers and other players have a vital role to play in driving economic progress.
Access to private credit has been crucial for US middle-market companies for decades. These businesses form the backbone of the American economy, providing employment for nearly 50 million people and accounting for approximately 40 percent of all private-sector jobs. It is important to recognize that these small to mid-sized companies have limited financing alternatives and are typically not large enough to access public debt and equity markets.
It’s easy to lose sight of the real-life impact of putting money to work for good companies that have been locked out of traditional financing sources. For example, in 2022 TCW was part of a lending group that provided Black Rock Coffee Bar's founders with a new credit facility that refinanced existing debt and provided additional capital to support their expansion plans.
For the communities where the coffee chain operates, this financing meant something more tangible: jobs and a gathering place. What started as a mid-sized business in the Pacific Northwest has now spread to seven states, bringing the company to towns and cities across the West. Each time they open a new location, around 20 people gain employment as baristas and managers. And for the locals, these coffee shops become a part of their daily lives. Since 2022, Black Rock has opened around 42 new locations and plans to double its current 132 shops over the next four years.
We're seeing this trend towards bespoke private market solutions continue to evolve with the growth in private asset-backed finance investment offerings. Private Asset-Backed Finance (ABF) is a segment of the market that provides loans to borrowers backed by contractual cash flows and assets, including consumer and small business loans, mortgages, hard assets, and other receivables. A key feature of this investment strategy is that the contractual cash flow and assets are placed into a bankruptcy-remote vehicle, fully controlled by the lender, that generally self-amortizes over time. This differs from corporate direct lending, where loans are backed by the cash flows and guarantees of the underlying operating businesses and generally are dependent on refinancing at maturity to repay the original loan balance. ABF can provide secured capital to specialty lending businesses that help finance underserved borrowers or communities, often providing a financing tool that can grow alongside the business.
It's not just borrowers that benefit from these new tools helping to finance the economy. Many of these innovations also unlock compelling and differentiated investment opportunities for a range of investors, including insurance companies, public and corporate pension plans, and individual investors. For example, private asset-backed finance solutions can offer bespoke risk, return, rating, and duration exposures resulting in a very valuable customized investment exposure for investors with constrained liabilities.
Banks and other traditional lenders will continue to play an important role in financing the economy. However, it's also clear that asset managers and other players have a vital role to play in driving economic progress and, at the same time, becoming ever more relevant to our investors and corporate partners. As needs for capital continue to grow, innovations in financing will continue to help shape a future in which more businesses, communities, and investors have the chance to prosper.