62 Finance and economics The EconomistJanuary 27th 20182Monetary policyCentral banking on autopilot
I
N THEIR quest to stabilise the job mar-
ket, central banks are setting a bad
example. Jerome Powell, whom senators
this week confirmed as the next chair-
man of America’s Federal Reserve, will
lead an institution with three existing
vacancies on its seven-member board,
and a fourth that will open up imminent-
ly. Not since July 2013 has its rate-setting
committee boasted the full complement
of12 voting members.
This monetary undermanning is,
however, much worse in Nigeria. Its
monetary-policy committee was unable
to meet as scheduled on January
22nd-23rd because it lacked the six mem-
bers necessary for a quorum. Five recent
nominees still await confirmation by the
country’s Senate. The chamberis holding
up all but a few executive appointments
in retaliation for President MuhammaduBuhari’s failure to remove an official (the
acting anti-corruption tsar) whom the
Senate twice rejected. In the absence of a
monetary-policy meeting (and the
lengthy communiqué that eventually
follows it), the central bank posted a brief,
scanned note on its website, explaining
that it would not tinker with its existing
policy stance.
According to some economists, this is
in fact just how monetary policy should
be done. Milton Friedman, for example,
thought the Fed should be replaced by a
computer that would increase the money
supply at a steady rate. Others have
proposed more elaborate, but equally
mechanical, rules. Allowing a few wise
men and women to meddle with the
money supply, governed by their own
discretion, is more trouble than it is
worth, these economists argue. The best
central bankers strive, with all the benefit
of their erudition and experience, to be as
boring as machines anyway.
In Nigeria, sadly, central banking is far
from boring. Although growth has re-
turned and the stockmarket is booming,
the country still suffers from stagflation: a
weak recovery combined with stubborn-
ly high price pressures. In such a predica-
ment, warm-blooded policymakers
sometimes rush to fight the “stag”—by
cutting interest rates prematurely—before
they have properly quelled the “flation”.
A Friedmanite might therefore hope that
Nigeria’s rate-setting committee remains
inquorate for a little longer.
In the scanned note, the central bank
welcomed recent improvements in fi-
nancial conditions and promised to
continue its “proactivity”. One difficult
art a computer would struggle to repli-
cate is that of irony.Nigeria is short of rate-settersNobody minding the shopSource: Haver AnalyticsNigeria, % change on a year earlier
Consumer pricesGDP2014 15 16 17051015202014 15 16 174048+lent out (see chart). In 2017 alone 24 direct-
lending funds raised a record $22.2bn. Such
funds do what they say on the tin: lend di-
rectly to firms, usually in the form of big,
multi-year loans. The borrowers are often
either companies that are too small to raise
equity or debt on capital markets, or priv-
ate-equity funds buying such firms.
Blair Jacobson of Ares Management, an
asset manager, says that the pummelling
banks took in the global financial crisis
“turbocharged” the direct-lending indus-
try. Ares set up its European direct-lending
arm, now one of the largest with $10.8bn
under management, in September 2007, as
the crisis broke. Most ofthe other direct-
lending firms moved into the business be-cause of the crisis and the dearth of bank
credit that ensued. Some were founded ex-
pressly for direct lending, notably Hayfin
Capital Management in 2009, which in
2017 raised more than €3.5bn.
Despite superficial similarities, these
firms are far from being banks. Many start-
ed out in more complex credit markets.
ICG, for example, specialised in the riskier
tranches of loans to private-equity firms.
Another, BlueBay Asset Management,
started as a bond-fund manager.
Direct lenders raise money from institu-
tional investors, to whom they usually pro-
mise returns of around 10% or even 15%. So
they cannot compete with the interest
rates banks charge borrowers. But they dooffer speed and flexibility. In Caronte’s
case, for instance, Mr Bonanno liked the
flexibility of Muzinich’s loan, such as the
ability to pay it back early. The largest direct
lenders, like Ares or Hayfin, can also com-
pete on their ability to write large loans,
even for several hundred million euros, off
their own bat. Since the financial crisis,
banks’ lending limits have been reduced,
and syndication to even a dozen others
can be like “herding cats”, in the words of
Hayfin’s Andrew McCullagh.
Direct-lending funds also differ from
banks in how much of their lending goes to
private-equity firms. More than four-fifths
involves private equity in some way,
whether to finance a buy-out or to lend
money to a private-equity-owned firm.
But that is changing. Many funds have
formed ties with firms that become repeat
customers when they need more financ-
ing. And direct lending is becoming better
known as a financing option. For certain
funds, a sizeable portion of their lending
now has no private-equity “sponsor-
ship”— about 40% for Hayfin, for instance,
a third for Muzinich, and nearly half in Mu-
zinich’s separate (albeit small) Italian fund.
The industry is also expanding geo-
graphically. As recently as 2013, Britain ac-
counted for almost half of direct-lending
deals; transactions elsewhere were often
done by fund managers jetting in from
London. But many European countries
have allowed funds to lend without a full
banking licence. And the EUplans to har-
monise the direct-lending market. In the
first three quarters of 2017, Britain’s share of
new deals fell to a shade over a third. Many
firms have set up regional offices, or even
country-specific funds such as Muzinich’s
Italian, French and British funds.
Direct lending covers a broad spectrum
of activity. At one end is Muzinich, with its
strong focus on small enterprises. This is a
far cry from Ares’s boasts of beingable to
lend €300m at short notice (although Ares
does lend to smaller firms, too). Yet both
are part of a continuing structural shift in
Europe, as a result of which small and mid-
sized firms have a viable alternative to
banks as a source of credit. 7One directionSource: Preqin †On June 30thEurope-focused direct-lending funds
Assets under management at year end, $bn0204060802006 08 10 12 14 16 17†“Dry powder”
(Cash in hand)
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