Apollo Global Management LLC and Ares Management LP are among private equity titans that scored a victory earlier this year when they persuaded Congress to let lending companies they control ramp up risk.
Now, as lawmakers engage in frantic negotiations to avoid a government shutdown, the industry is back in Washington seeking more.
At issue are business development companies, which provide loans to small and medium sized businesses and are part of a private lending boom that’s exploded since the 2008 financial crisis. As Congress debates year-end legislation to fund federal agencies, BDCs are urging lawmakers to add a measure that benefits their industry. The push is part of a broader lobbying campaign to get regulators to ease rules.
Congress has already shown it’s willing to help BDCs, which have financed a number of businesses in politicians’ home states that struggled to get loans from banks. In passing an earlier spending bill in March, lawmakers attached a provision that allowed BDCs to double their leverage -- in other words, borrow more money to fund loans. While that change could make the companies more profitable, it would also exacerbate losses if the businesses they lend to default.
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In recent months, Apollo and Ares have set their sights on the Securities and Exchange Commission. They want the agency to remove what they say is a key hurdle to BDC growth: Complicated regulations that make it difficult for mutual funds and other big money managers to invest in the companies.
As part of the industry’s campaign, it’s urging lawmakers to add a measure to the end-of-year funding bill that would force the SEC’s hand, according to lobbyists and congressional staffers. But there are risks. Revamping SEC rules could expose more investors - including retirement savers -- to the indebted businesses that BDCs lend to.
“The nature of the BDC model is to take credit risk, and at the next downturn, losses will absolutely pick up,” said Jason Arnold, an analyst at RBC Capital Markets who follows BDCs. “But it isn’t crystal clear how high those losses will be. And in the short term, this change would be a big plus for investors and the companies.”
Apollo, Ares, KKR & Co., BlackRock Inc. and Goldman Sachs Group Inc.’s asset management unit operate some of the biggest BDCs. The money managers profit by charging BDC investors fees for overseeing the companies’ loan portfolios. BDCs manage a combined $97 billion, more than double their assets five years ago.
“The growth of private lending is good public policy -- providing needed capital to middle market companies that drive GDP growth,” Joseph Glatt, an Apollo BDC lawyer, and Joshua Bloomstein, an Ares BDC attorney, said in a joint statement.