Jeff Schwartz, founder and managing partner of Corbel Capital Partners, has long been a vocal advocate for the potential of private debt markets. In his thoughtful leadership and industry contributions, Schwartz paints a compelling picture of this dynamic segment of the financial landscape, highlighting its growing role in fueling business growth and generating attractive returns.
With almost two decades as a principal investor and nearly 30 years in the financial services sector, Schwartz steers Corbel’s structured private debt and equity investments and serves on the boards of several Corbel portfolio companies.
But that wasn’t his dream when he graduated from the prestigious Wharton School with a degree in economics.
“When I was in school, I certainly didn’t think that finance would be the path for me,” he told Ideamensch. “I was going to business school to start my own business, not to specialize in private equity. But the truth is that entrepreneurs are more about the drive than the speciality. Once I had the expertise down pat, it was an easier transition to go from having employers to being one.”
Jeff Schwartz: ‘A Need for This Capital’
Schwartz identifies a turning point in the emergence of private debt: the global financial crisis of 2008.
In an interview on the Ontra “Dogs and Docs” podcast, Schwartz elaborated. “Post-2008 in the financial crisis, many of the banks, there was significant bank consolidation, and the regulatory and reserve requirements placed upon traditional lenders increased significantly, so banks were less inclined to aggressively lend to small businesses, and lenders or other institutional investors recognized that there was still a need for this capital that was not being filled in the marketplace and formed private lending institutions — effectively private banks that were unregulated or less regulated than the traditional banks.” Schwartz champions the "structured capital" approach within the private debt market. This methodology transcends the limitations of traditional loan structures, instead crafting bespoke financing packages tailored to the specific growth trajectories and risk profiles of individual companies.
“There were many, many, many small businesses looking for what we at the time called structured equity,” he noted. “Now, it’s turned into more structured debt, but a structured investment product that provided them capital to either grow or recapitalize their businesses and also a level of private equity support and sponsorship that certainly doesn’t exist from a normal lending institution.”
Jeff Schwartz: Benefits for Businesses and Investors Alike
Schwartz underlines the dual-pronged benefits of private debt. For smaller businesses, it offers a vital source of capital that can fuel expansion and innovation, without the immediate need to relinquish control or ownership. This can be particularly impactful for early-stage ventures or businesses navigating periods of rapid growth. For investors, private debt presents the potential for attractive returns and diversification, complementing broader portfolio strategies.
While optimistic about the future of private debt, Schwartz acknowledges potential roadblocks on the horizon. Rising interest rates and economic uncertainty are seen as factors that could impact the market, potentially curtailing access to capital for some businesses. However, Schwartz expresses confidence in the resilience of private debt, highlighting its ability to adapt to changing circumstances and innovate its service offerings.
“In a low-interest-rate environment, people are aggressively seeking yield and seeking return, and one way to do that is to lend more aggressively in a current cash-yielding product,” Schwartz said on the podcast.
“While investors were not able to earn any money in the money market or traditional municipal bonds or investment-grade credits, or even high-yield bonds, to a certain extent, there was a demand not only for this type of capital albeit higher costs for companies; there was a demand for investors to earn those higher yields in relatively low-risk security or investment, which has created the development, supported the development, both from the supply side and demand side of this private debt market.”
The study, conducted by independent survey company Censuswide asked 1,000 members of the UK public about their views on the economic outlook for 2019.
A total of 44% of respondents said they
expected a financial crisis worse than 2008. Additionally, over a third of
those polled (41%) said they are expecting to see a housing crash happen this
year.
Only 14% of the population said they had
forgiven the banks after the 2008 financial crash, according to a new poll from
Spearvest, the wealth management firm.
As well as this, there is a significant
distrust from consumers that banks have their best interests at heart. The
survey found that over half (55%) did not believe this to be true, with only 13%
believing they did.
The poll also found that consumers want
banks to do more for good causes with 60% believing that banks should donate
and fundraise for charities more.
Wael Al-Nahedh,
CEO of Spearvest comments:“With widespread concern around the performance of the housing market
and the wider economy, 2019 already looks set to be a challenging year for
investors. It’s also clear that the financial services industry needs to do
much more to win back trust of the public, supporting good causes and
demonstrating a genuine commitment to charitable giving.”
(Source:
Spearvest)
With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.
Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.
As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.
Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.
Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.
Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”
The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.
If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.
In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.
The financial crisis in 2008 has cast a long shadow. There has been growing pressure on the government to increase accountability and governance in the financial services industry through legislation and regulatory reforms. One such reform that is set to take effect later this year and eventually apply to much of the industry within a year is the extension of the Senior Managers and Certification Regime (SM&CR), which seeks to improve the accountability and responsibility of senior personnel. This week Finance Monthly hears from Alexander Edwards, a Senior Associate at Rosling King LLP, who discusses the details of the new regime and explains what action management should take moving forward.
This extension of the certification regime is being overseen by the Parliamentary Commission for Banking Standards (PCBS), which was set up to improve accountability and standards in the industry.
When the certification regime was originally being considered, the commission’s recommendations ranged from general observations on standards – it suggested that firms need to take more responsibility for employees being fit and proper to ensure better standards of conduct at all levels, to the far more specific – notably recommending a new accountability framework for senior management.
As a result of the PCBS recommendations, Parliament voted through legislation in December 2013 which resulted in the Financial Conduct Authority (FCA) applying the SM&CR to the banking sector. Parliament subsequently voted through further alterations to the legislation in May 2016, requiring the FCA to extend the regime to all firms authorised by virtue of the Financial Services and Markets Act 2000 (FSMA). Similar measures have been adopted in other sectors as a way of building trust, such as the Financial Reporting Council that now oversees the appointments of directors at the big audit firms.
It is worth looking at the certification regime in greater detail and understanding what exactly the FCA has been saying about it to fully appreciate its implications. In its 2018/2019 business plan the FCA mentioned that the new rules, concerning the extension of the SM&CR to all FSMA firms in 2018/2019, were due to be published in the summer of this year.
In the FCA’s business plan, they highlighted that they were working on finalising the rules for the extension of the certification regime to all FSMA regulated firms, with a view to reflecting the FCA’s intention to tailor the regime to “reflect the different risks, impact and complexity of firms in a clear, simple and proportionate way.” Considering that the SM&CR is due to be extended to cover c.47,000 firms, that is no easy task.
There are three primary groups who will be regulated by the SM&CR: Solo-regulated firms, insurers and banks.
Solo-regulated firms
For solo-regulated firms (regulated by the FCA only) the SM&CR will replace the Approved Persons Regime. In July 2018, the FCA released feedback and near-final rules, along with a guide on the SM&CR for FCA solo-regulated firms. The aim appears to be, as it was from the beginning, to address and limit the lack of accountability of senior management which can subsequently drive poor conduct. The result: making senior management more responsible for their actions and conduct. The guide is designed to help firms which are moving across to the certification regime.
Insurers
For insurers the SM&CR will replace the Approved Persons Regime and the PRA's Senior Insurance Managers Regime. The Treasury has confirmed that the certification regime will start to apply to insurers on the 10th December 2018.
Banks
The SM&CR already applies to UK banks, building societies, credit unions, branches of foreign banks operating in the UK and the largest investment firms regulated by the PRA and the FCA.
So as we can see the certification regime has gone from covering banks, building societies, credit unions and PRA-designated investment firms, to covering all FCA solo-regulated firms.
It is worth noting that the extension of the certification regime will affect not only firms authorised and regulated by FSMA and the FCA but also EEA and third-country branches and insurers. Although the FCA has noted that the final rules in relation to the extension of the SM&CR are subject to change, particularly following any Handbook changes which follow the UK’s exit from the European Union.
To ensure that the new regime is proportionate and flexible enough to accommodate different business models, the FCA are introducing 3 different tiers of application:
Core Regime – this will apply to the majority of FCA solo-regulated firms;
Enhanced Regime – additional rules which will apply to c. 350 FCA solo-regulated firms, applying additional rules due to the size, complexity and potential impact on consumers of the firm;
Limited Scope Regime - applies to firms with a limited application of the approved persons regime e.g. limited permission consumer credit firms.
In response to the FCA’s consultation, respondents have requested further clarification in relation to the extension of the rules. Following receipt of responses, the FCA has confirmed that they will make some minor changes to the proposed rules. For example, they will lengthen the time period from 6 to 12 months for firms to implement the Enhanced Tier, once they meet the relevant criteria.
So what are the key conclusions firms should draw and actions they should take from the consultation?
Firstly, all firms which are regulated and authorised under FSMA and the FCA should be considering and reviewing the rules and functions of their personnel at this stage, to consider how the extension of the regime will affect them.
The date for implementation is set as 9 December 2019 (and 10 December 2018 for insurance firms), so firms should be looking at their own operations and consider transitional provisions at this early stage to ensure they are adequately prepared for the change. Particularly in the run up to Brexit, firms should also be re-reviewing their systems and operations to ensure that any changes to the Handbook are implemented as appropriate.
From a practical point of view, introducing the certification regime into firms in which it does not currently apply is likely to cross the borders of many departments, from Legal to Compliance to HR, so whilst December 2019 may seem far off now, experience has shown us that this will involve a broad spectrum of individuals and departments to successfully and smoothly transition to the SM&CR.
In 2008 the global financial crisis hit business worldwide and recovery has been slow ever since. At the centre of this recovery banks have played a vital role, but attitudes have shifted over the years. Here Marina Cheal, CMO at Reevoo, answers the question: have banks earned our trust back?
When is a bank not a bank?
In 2008 the major financial institutions managed to comprehensively dismantle consumer trust. Since then, they’ve tried almost everything to win that trust back – but the main change is what’s happening around the big banks, not within them.
The Big Six survived the 2008 crash (some by the skin of their teeth) but nearly ten years on they’ve still to rebuild consumer trust. Their customers remain – mostly out of necessity or inertia. But changing attitudes, expectations and regulations mean a raft of challenger banks are ready to snap them up.
And those big banks have no one to blame but themselves.
Pre-2008, banking customers were supposed to look out for stability, tradition, heritage above everything, even customer service. Customers would put up with inconvenient branch opening hours and computer-says-no failed mortgage applications because at the time, legacy was a good thing.
Today’s banking customer has done a complete U-turn – influenced not just by the failings of the big financial institutions, but innovation in almost every other industry. Compared to how easy it is to set up a Gmail or Uber account, banking is in the dark ages. Challenger banks’ USP is helpfulness not heritage, speed not solidity - and it’s blowing a wind of change through the industry.
This has led to the birth of a clutch of new smartphone-only banks that are focused on making banking a more user-friendly experience. Understanding that banking isn’t just about holding onto and shelling out the customer’s cash when required, these ‘neo-banks’ put money management back into customers’ lifestyles. What, if anything, is the bedrock of people’s modern lives more than money?
So instead of lining up deposits and debits and administrating standing orders, these banks review the customer’s spending patterns, established commitments to help customers better understand how much cash they really have in hand. Oh, and making the experience enjoyable while they’re at it.
Tom Blomfield, founder and CEO of one of the most popular smartphone banks, Monzo, doesn’t believe that the incumbent banks are under immediate threat. He does, however, insist that they will have to change.
He told the People Tell Richard Stuff podcast: “Big banks don’t need to fail for startups to succeed. We’re still fractions of a percent of the market. But retail banks will look dramatically different in five years. They may not have to fail, but that’s not to say that some won’t,” he warns.
Mark Mullen is chief executive of Atom Bank and the former CEO of First Direct. His view is that the market is changing in response to customer needs and it really is time to move with the times.
“When regulation changes, banks change in response. The question is really what drives regulation. A lot of what we see today has been driven by the crisis but also a broader range of influences like advances in technology. The great majority of innovation in banking didn’t start anywhere near banking and so it’s had to respond.”
There can be no doubt that the Big Six have been slow to respond to the changes in the retail banking sector. Barclays only launched a mobile app in 2012 and the majority of mobile banking apps are simply a pared down version of online banking - in many cases, so pared down that the app still can’t perform simple tasks such as pay someone new without referring to the online portal.
Open banking looks set to be the real spanner in the works for banks. PSD2, the second Payment Services Directive will open up customer banking data (with consent under data protection legislation) to anyone the customer is happy to share it with.
This can include but isn’t limited to: online retailers, utilities, insurers... in fact, anyone who can provide the customer with great user experience and simple financial management under a trusted brand.
Being side-by-side, and in some cases having to cooperate with more nimble companies will be an unfavourable comparison – and may shepherd customers toward banks that can offer a more tech-forward solution.
Mullen explains the challenge ahead, for challenger banks as well as incumbents: “Open banking and PSD2 paved the way for an API economy in financial services. The acid test of whether it succeeds is less to do with technology or regulation. What will motivate customers to engage in a different banking model and fundamentally - what’s in it for them?
“We’ve lived with the universal banking model and the one stop shop. The open banking model has to be as convenient. I wouldn’t underestimate that. You can have a great reputation and tick the boxes you think are important and still struggle because the trade-off of effort versus return isn’t transparent.”
This still won’t necessarily drive the big banks into obsolescence but it will strip away the brand and service elements until our hallowed institutions are nothing but white label providers of banking functions. The account management, the ancillary services and the relationship will be with whoever can deliver consumer trust, 2018-style.
Mullen concludes: “This is a very big banking market and there are lots of opportunities for us to develop over the next five years. When PSD2 enacts in January, the world won’t be different but there will be a competition for customers and products over the year.”
