By Jeff Sommer
1752 words
18 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

SPENDING money can be delightful. But losing it? If you are watching big chunks of hard-earned savings disappear, losing money can be sheer misery.

That's why the headlines proclaiming the arrival of a bear market have been so disturbing. Strictly speaking, a bear market is simply Wall Street jargon for a stock market decline of at least 20 per cent. But this is not merely a matter of numbers. The term's technical meaning doesn't convey the full human experience.

Really, the fact that we are in a bear market means that a lot of people have already lost a ton of money. Until the momentum shifts, as it eventually will, considerably more wealth will go down the drain. Panicking only makes matters worse. For those who are taking enormous losses for the first time, a bear market can be the shattering of dreams, a time for suffering and grief.

Far more significant trouble could be coming, though, for the millions of people who have never been able to put aside enough money to lose it in the stock market. A recession may well be on the way. The United States has been in recession 14 per cent of the time since World War II, according to data provided by the National Bureau of Economic Research, the quasi-official entity that declares when recessions start and stop in the United States.

With the Federal Reserve raising the benchmark federal funds rate 0.75 percentage points on Wednesday (Jun 15), and forecasting further increases to combat raging inflation, we certainly could be headed towards another recession. The Fed is also paring the bonds and other securities that it amassed on its US$9 trillion balance sheet to bolster the economy. In a policy reversal, it is now engaged in "quantitative tightening", and that will contribute to an economic slowdown.

Like bear markets, recessions have a dry, technical definition. A recession is "a significant decline in economic activity that is spread across the economy and lasts more than a few months", according to the economic research bureau.

But, basically, a recession amounts to this for millions of people, many of whom are utterly indifferent to the vagaries of the stock and bond markets: Hardworking people will lose their jobs, millions of families will be short on money and countless people will suffer setbacks to their physical and mental health.

This is grim stuff. If I could design a world that eliminated the misery of bear markets and recessions, of course, I would.

But don't wait for that to happen. The best we can do now is to recognise that bear markets and their far more troubling cousins, recessions, are not rare or truly unexpected events, even if the relative calm of the last decade may deceive us into thinking so.

Despite policymakers' best efforts, history shows that both bear markets and recessions are about as common as severe storms in New York. Learn to live with them, much as you do bad weather.

Practical steps

Stocks don't always go up. Risk is always present.

This may seem a banal insight, yet it is never entirely understood until market declines hurt, only to be ignored or forgotten when the next boom rolls around.

Try to take only as much risk as you can tolerate. Long ago, I stopped investing in individual stocks and bonds, eliminating the risk of owning the wrong security at the wrong time. Instead, I favour low-cost, diversified index funds that enable me to hold a piece of the entire global stock and bond market. And I've reduced my stock exposure as I've aged and increased my bond holdings. Bonds haven't done well lately, but Treasurys and high-quality corporate bonds are still far more stable than the stock market.

Before investing, try to put away enough money to survive an emergency, and keep it in a safe place. If you have already managed to accumulate some cash, I've described some reasonable places to keep it, especially in this period of severe inflation.

They include I bonds, which are issued by the Treasury Department and are paying 9.62 per cent interest. (The rate is reset every 6 months.) Also, money market funds are beginning to pay higher interest after months of being stuck near zero. High-yield bank accounts, short-term Treasury securities and even some corporate bonds are also options.

Then, when it comes to investing, try to think really long term, meaning a minimum of a decade and, preferably, much longer than that. I wouldn't put any money into the stock market that you are likely to need to spend soon.

In the past, after big declines, the stock market has always come back. Over 10-year periods, if you had put money into the entire S&P 500 you would have lost money only 6 per cent of the time. Over 20-year periods, you would never have lost money.

Above all else, be prepared for the markets to fluctuate. It is clear at this moment that they don't always rise. In fact, history shows that big declines are a normal part of investing.

Why recent history is deceptive

Bull markets are a far more pleasant than bears, and they are overwhelmingly the predominant experience of people who started investing after Mar 9, 2009.

That was the day the S&P 500 hit bottom after a 57 per cent bear market decline. That terrible fall occurred in the financial crisis that started in 2007. What turned the market around was the Federal Reserve, which cut interest rates to nearly zero, bought up trillions of dollars in bonds and started a bull market in stocks that lasted nearly 11 years.

That glorious time for the S&P 500 ended on Feb 19, 2020, near the start of the Covid-19 pandemic. There was a brief bear market until the Fed intervened again, and on Mar 23, scarcely one month later, another bull market began, one that lasted almost 2 years.

If that is all you know, this year's bear market may seem a rare aberration, a random downturn in a world where market gains are the norm.

But I think that would be a serious misreading of history. Data provided by Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, provides a broader perspective.

Since 1929, the US stock market has been in a bear market nearly 24 per cent of the time. Note that in this authoritative accounting, a bear market starts on the first day of declines that become 20 per cent downdrafts. According to S&P Indices, the S&P 500 has been in a bear market since Jan 3, when the decline began.

You may quibble with this definition of a bear market, but the main point is irrefutable: Major market declines have always been an integral part of investing, and if you are going to put your money into stocks, you need to be ready for it.

Recessions happen often

We are in a bear market. We might be in a recession right now, but the economic research bureau doesn't even attempt to make recession calls in real time.

In the past, it has declared the beginning and the end of recessions somewhere "between 4 and 21 months" after these events have occurred. As the bureau explains it: "There is no fixed timing rule. We wait long enough so that the existence of a peak or trough is not in doubt, and until we can assign an accurate peak or trough date."

Economists are great at many things, but predicting recessions isn't one of them. "Recessions are very difficult to predict," Ellen Gaske, lead economist at PGIM Fixed Income, said in an interview on Tuesday. "Even if you get one right, chances are you won't get the next one."

But we do have precise readings on the dates of past recessions going all the way back to 1854. Using data from the bureau's website, I did some calculations, with the help of Salil Mehta, a statistician. I found that since 1854, the US has been in a recession 29 per cent of the time. From 1945 till 2020, it was in a recession only 14 per cent of the time.

But consider this finding, derived from the data and produced by Mehta: On any day in the postwar period, the chance that the US was in a recession or would be within 2 years was 46 per cent.

What does that tell us about the odds of the US falling into a recession fairly soon? Not much, except that the odds are always reasonably high, and it is wise to prepare.

That said, my own fallible assessment is that it would be a welcome surprise if we don't have a recession. Sharply rising interest rates, levitating energy prices and steeply falling stock prices have often been associated with recessions.

But even if none of these factors turn out to be important, it is still relevant that recessions occur with dismaying frequency. The Federal Reserve has tried to smooth the economic cycle, but the "great moderation", a term popularised in 2004 by Ben S Bernanke, the former Fed chairman, is conspicuous by its absence.

Turmoil is a constant recurrence in the markets and the economy. That's easy to see when financial and economic disruptions are commonplace but will no doubt be forgotten again. That's just the way it is.

By the same token, these rough times won't last. Knowing that may not help much if you are already suffering.

But if the future is anything like the past, it is highly likely that the economy will grow over the long term and that financial markets will produce handsome returns for patient, diversified investors. Understanding that downturns, even severe ones, are an inevitable part of life may even help you avoid some pain down the road. NYTIMES

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706 words
19 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

STOCK traders who whipped up the meme craze that took Wall Street by storm last year are furiously rushing to the exits.

Roughly 50 per cent of single-stock retail positions in the Nasdaq 100 and a quarter of those in the S&P 500 that had been accumulated since January 2019 have been sold, according to data from Goldman Sachs Group. In another sign their exuberance has faded, call-option volumes have reversed about 70 per cent of their increases from the start of 2019 to November 2021, when tech stocks and Bitcoin peaked.

"While historically retail investors have bought the dip, this time they haven't," wrote John Marshall, head of derivatives research at Goldman Sachs.

Wall Street had been obsessed with how at-home traders were behaving during the pandemic when it came to the market. The boredom-markets-hypothesis - which postulated that many of those were stuck at home with little to do turned to stocks to fill their time and satisfy their boredom - became just about settled science. Stocks only go up, the saying went at the time, with indexes notching impressive returns even as the pandemic raged.

Hordes of day traders flooded social-media forums like Reddit and Twitter and fed each other information and trading tips. Their collective efforts famously pushed up shares of GameStop and AMC Entertainment, among others, dealing a blow to big-name short sellers who had bet against those stocks.

But the tides have turned and 2022 has offered only rough trading and much gut-wrenching volatility. The gumption among the retail crowd to buy the dip has come to a test, with the strategy not faring as well in a market that's seen the S&P 500 lose more than 20 per cent and the Nasdaq 100 drop 30 per cent this year. In fact, a retail-investor behaviour measure by TD Ameritrade shows they have been cutting exposure to equities all year.

"The way that they're likely going to be trading going forward is likely selling dips as they try to protect any gains that they may have or reduce further losses," said Eric Johnston, head of equity derivatives and cross asset at Cantor Fitzgerald. "We can no longer count on the individual investor to be a backstop for this market."

All manner of investments have lost value in 2022. Among the retail crowd, tech and biotech have been heavily sold, according to Goldman. Meanwhile, a basket of retail-favoured stocks tracked by the bank has lost more than 40 per cent year to date, and another made up of companies most frequently mentioned on social-media forums is down roughly 50 per cent. Crypto, another individual-investor favourite, has also been stuck in the gutter.

A key concern for economists, now that the Federal Reserve is working on cooling the economy and inflation, is how the consumer will bear it out. And while a debate rages over the central bank's ability to engineer a softish landing or over-correct into a recession, even a mild one, consumers have already shown some signs of pulling back. Data this week showed retail sales in May unexpectedly declined for the first time in 5 months.

Charles Schwab surveyed over 1,000 of its retail clients in April and found that 57 per cent of respondents have a bearish outlook on the US stock market for the second quarter of 2022, an increase of 29 per cent from the same time last year. The primary driver of the negative outlook is the higher cost of living, followed by geopolitical concerns, according to Schwab.

"Consumers are pulling back," said Chris Gaffney, president of world markets at TIAA Bank. "We're seeing most investors sit this out, which is probably smart, sitting out the volatility."

Still, Goldman says retail investors are continuing to put money toward exchange-traded funds, especially, and dividend-focused ones, which have seen more than US$30 billion of inflows this year.

"There has been a regime shift from the old FAANG megatech names to more defensive, income plays," said Jane Edmondson, chief executive and founder of EQM Capital. BLOOMBERG

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Genevieve Cua
1409 words
19 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

THESE days it seems there is nowhere to hide from dismal market news. Year to date, stocks and bonds are down based on broad indexes. Even conservative investors whose portfolios are mostly invested in bonds are likely to be nursing losses.

As a financial journalist with more than a couple of decades covering wealth and personal finance issues, the received wisdom in these times is this: Diversify, stay the course, don't panic. Easy to say or write, but these are cold comfort when your portfolio is mired in red.

First, here are some disclosures: Despite my years covering markets and hours of conversation with the most seasoned and successful of asset managers and advisers, I've made some horrible mistakes. Among the most memorable was investing in a tech fund at the peak of valuations in 2001 (I bought into the hubris of the time), and then riding the loss all the way down. If I remember correctly, my loss was over 80 per cent. I actually forgot all about this holding, and was recently reminded when I received a notice that the fund has closed – and in the mail was my liquidation cheque.

That, at least, was not a total write-off. I did have a slight gain above my capital of less than 2 per cent annualised over around 2 decades – pathetic since the fund was supposed to be a growth fund.

But by far the more painful experience was the permanent capital loss incurred via ill-fated investments. Just prior to the 2008 global financial crisis, for instance, we sought to invest in a Philippine bond, but on the advice of our banker, invested instead in a triple-A rated Iceland bond. That bond defaulted when Iceland's banking system collapsed in 2008. We recovered just 10 cents on the dollar. Such bad experiences still make me wince.

Today I grapple with the quandary that almost all investors face. Asset class correlations have shot up. This means that a balanced portfolio of stocks and bonds has likely incurred losses, and fixed income assets fail in their traditional role as ballasts. Equity markets are in bear territory; some equity funds have incurred double-digit losses of more than 50 per cent year to date. Fixed income assets are also down on a marked-to-market basis, albeit by a relatively lower quantum. But staying in cash, particularly for an older individual like myself, isn't an option because of inflation.

Here are some lessons I've taken to heart through the years. I share them in the hope that it may help you to take stock.

Behavioural biases are real. It is often said that we are our worst enemies when it comes to investing, and this shows up particularly when markets are in crisis mode. I'm keenly aware of my foibles. One is anchoring, which occurs when the price at which one buys an asset forever colours how you view your investment. My tech fund investment is a stark example. On hindsight, my reluctance to realise the loss led to an even greater opportunity cost: I would have done better to have bitten the bullet and reinvested what was left of my capital into a sensible balanced fund.

Then, there is loss aversion, which occurs when people prefer to avoid loss rather than seek gains. As I get older, it takes even more effort to resist this urge to avoid loss. But there are ways to mitigate these all-too-human impulses, which I'll get to in this column. Diversification works. While correlation among asset classes does converge to 1 in periods of market stress, a mix of various asset classes does help to mitigate the risk of failure of any single security and helps you to sleep at night, even if returns may not be the highest. I've seen this at work in my mother's portfolio, held in a trust for the children. The portfolio comprises mostly individual bond holdings, a sprinkling of stocks and around a handful of funds. It is not traded, and the clipping of coupons and dividends through the years has enhanced total returns. Year to date it has suffered a relatively modest loss of less than 10 per cent, ironically because of some thematic growth funds entered into last year on the advice that the portfolio had hardly any exposure to growth assets.

My own portfolio (jointly with my husband) is more recently deployed in a similar strategy of selected individual bonds and a mixture of Reits and stocks. Each stock comprises less than 1 per cent of the total portfolio. This diversification is a hard-won lesson after the knocks we suffered from permanent losses from stocks and bonds gone bad, and being overly concentrated in specific securities. While there is a decline in capital value month to date, I take great pleasure in seeing a positive balance on the income ledger – even if modest for now.Time in the market. Rather than timing the market. Fund managers espouse this principle, but it is among the hardest to pursue, simply because every crisis feels like the worst. Today feels like a perfect storm – rising interest rates, falling equity and bond markets, sticky inflation, war and the threat of recession. But 2008 arguably felt even more bleak when US subprime loans imploded and pundits invoked the Great Depression of 1929.

On hindsight we know how things panned out: The Federal Reserve backstopped markets with quantitative easing. But at the worst of the crisis, this outcome was far from clear. Long-term data from the Capital Group provides some comfort. Based on data between 1951 and 2020, the S&P 500 index has typically dipped about 10 per cent about once a year, and 20 per cent or more every 6 years. Each downturn was followed by a recovery and a new market high. Enlisting a financial adviser should help you to stay the course with an appropriate asset allocation.Some helpful strategies. Here are some things that help me to keep the long term in sight:

- One, spell out your investment objectives. For me, it is to have a balanced portfolio of assets with the very important qualifier that the assets must generate an income. Today's market downturn opens up opportunities to invest in high-quality bonds, blue-chip stocks and Reits that pay dividends, some well over 5 per cent. Our portfolio must generate a stream of passive income to complement our CPF Life annuity, in preparation for the time that I choose not to work.

- Two, avoid checking your portfolio value too often. I'd like to also say avoid reading market news too closely, but it's a requisite for my job.

- Three, costs matter, particularly when returns are expected to be more muted than they have been in the past. If you have an adviser, you should be informed of his or her fees and whatever commissions they earn from your funds. Ideally if you are paying a portfolio advisory fee, all retrocession or fund trail fees or commissions should be rebated to you.

- Four, avoid leverage which magnifies your losses. Banks are happy to earn fees from a client's assets and liabilities, but they are very quick to withdraw margin facilities when markets drop. You do not want to be forced to sell assets to cover margin calls.

Here's the hardest part: Take stock of the assets that are loss making, and do the research on their long-term prospects for growth. If your fund or stock has fallen 50 per cent, it will need to double just for you to break even. How likely is that, and do you have the holding power? Because of the upward rate cycle and slower economies, growth assets are being revalued downwards and hence, it becomes even more important that you let go of your price "anchor'' or historical purchase price.

If you are convinced that the growth prospect is good, that your fund is well managed and not dependent on a single star manager, for instance, then it may make sense to invest a regular amount as prices drop. But given where yields are at the moment (higher) and where asset prices are (lower), it may make sense to bite the proverbial bullet for more promising long-term opportunities.

SPH Media Limited

773 words
5 July 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

AS international authorities launch probes into recent cryptocurrency-related collapses, Singapore's regulators have also started moving. Industry players, however, are questioning if it is moving fast enough, and with sufficient force.

Last week, the Monetary Authority of Singapore (MAS) reprimanded crypto hedge fund Three Arrows Capital for providing false information and exceeding its assets under management threshold. MAS also revealed it has been investigating Three Arrows since 2021.

But a reprimand seems mild given what other authorities have done.

Prosecutors in South Korea, for instance, have imposed a no-fly ban on current and former employees of Terraform Labs and Luna Foundation Guard, following an "emergency investigation" in May into 2 complaints lodged on behalf of 81 investors.

In the United States, the Securities and Exchange Commission is said to be investigating if the marketing of the stablecoin before it crashed last month violated federal investor-protection regulations,

Terraform Labs and Luna Foundation Guard, linked to the blow-up of stablecoin terraUSD last month, are registered in Singapore.

In response to The Business Times' queries on whether MAS is working with other jurisdictions or investigating the implosion, MAS deputy managing director for financial supervision Ho Hern Shin said: "(The 2 companies) are not licensed or regulated by MAS, nor have they applied for any licence or sought exemption from holding any licence."

MAS is "considering an appropriate regulatory approach" to emerging decentralised protocols, she said, noting that the stablecoin's collapse highlights the challenges of regulating decentralised governance models in which an autonomous programme, rather than a legal entity, conducts regulated activities such as token issuance and redemption.

To be fair, the authority has made its stance clear by reiterating that investing in cryptocurrencies is risky and not suitable for retail investors.

In allowing the market to self regulate, it is holding true to this stance: Retail investors who choose to dabble in cryptocurrencies do so at their own risk.

Regulators here have also been stringent in granting licences for entities to operate crypto businesses here. MAS chief Ravi Menon said last year that approving only half of the licence applicants, but only those "with very high standards", would be a better outcome than green-lighting all of them.

This approach, however, has not prevented crypto companies from setting up shop here and subsequently disappointing their stakeholders.

BT has heard from many players in the ecosystem who are anxious for regulators to take a more active hand.

In some cases, there is little regulators here can do. TerraForm Labs is one such example. While registered here, it is not regulated under the primary legislation that oversees digital payment token service providers.

Singapore's Parliament in April passed new measures that will require domestically registered entities offering digital token services outside of Singapore to be licensed, but these laws have yet to take effect.

But perhaps more action could be taken against regulated entities, and in a more timely manner.

Three Arrows, for instance, is licensed here as a registered fund management company. It was served a liquidation order by a court in the British Virgin Islands on (Jun 27) after it failed to make payments on its loans, and has filed for bankruptcy. The 10-year-old hedge fund was founded by Singaporean crypto billionaire Zhu Su and Kyle Davies.

Or take liquidity aggregator FINXFLO, which appears to also be dealing with insolvency woes. Chairman James GIllingham was let go by the company for "gross misconduct and wilful neglect" while employees have not been paid since March, according to FINXFLO community on Telegram.

FINXFLO is among a list of companies exempted from holding a licence while its application is under review by the MAS.

Investors would be assuaged by greater government intervention. Improved confidence in crypto investing may or may not be what MAS hopes for.

Yet, MAS chief fintech officer Sopnendu Mohanty said in a recent interview with The Financial Times that Singapore will not tolerate any bad behaviour.

"If somebody has done a bad thing, we are brutal and unrelentingly hard," he said.

More must be done if the Republic is to live up to this resolve.

It might still be early in the day for crypto disasters. But if Singapore comes up all too often in future disasters, its reputation as a responsible crypto hub could be at stake.

MAS has made its stance clear by reiterating that cryptocurrencies are not suitable investments for retail investors. PHOTO: PIXABAY

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Tay Peck Gek
986 words
5 July 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

WITH a first-year interest rate of 2 per cent and a 10-year average rate of 3 per cent - a record high - the August tranche of Singapore Savings Bonds (SSBs) will almost certainly be oversubscribed. It is a shame, however, that more Singaporeans aren't applying for the issues.

The July tranche, with a slightly lower rate of 1.69 per cent for the first year and 2.71 per cent on average over 10 years, received applications to the value of S$1.3 billion for an issue of S$600 million.

Those who applied for S$18,000 or less would have received the amount in full as long as they have not exceeded the S$200,000 limit across tranches. Among those who applied for more, 17 per cent were allotted an additional S$500 on a random basis.

The keen interest in recent tranches of SSBs is understandable. Presently, fixed deposit rates offered by banks for a tenor of 1 year are mostly, if not all, under the rates offered by the July and August savings bonds, making the government security appealing.

Yet, only 120,000 individuals were holding over S$5.7 billion worth of SSBs as at the start of 2022.

Given the rising interest rate environment, it is time that more local investors gained a deeper understanding of this fixed income instrument.

A retired colleague thought this bond was traded, and was concerned about interest rate risks. Bond prices tend to fall as interest rates rise. Meanwhile, my sister and her friends in their 40's - either university- or polytechnic-educated - knew little about SSBs. They chose to park their holiday funds in a fixed deposit with a bank, waiting to roll it over till their trip next November.

Of course, to each his own. But perhaps more would be interested if they understood the product.

SSBs were launched in 2015 and there is an issuance every month at interest rates pegged to the daily average yields of the Singapore Government Securities the month before.

While the instrument is labelled a bond, SSBs are more similar to savings deposits (not even a fixed deposit, given there is no lock-in period for SSBs) than bonds. The instrument offers interest rates that are specified at the time of application and locked in for 10 years, but investors are free to withdraw or redeem the funds at any time during the 10-year period.

Withdrawals in multiples of S$500 or the entire principal sum before maturity do not see any accrued interest being forfeited, and the remaining funds continue to earn interest.

Because SSBs are not traded, your capital is not affected by interest rate movements.

In fact, investors would need approval from the Monetary Authority of Singapore to transfer it or pledge it as collateral.

While banks here have a very low default risk, the SSBs issuer, the government, has an even better credit profile.

SSBs are not without drawbacks. For one, there is no option for investors to reinvest the accrued interest should they have no need for the interim payouts. Granting this option would better meet the objective of SSBs as a long-term savings product.

Also, redeemed funds are not paid out instantly but by the second business day of the following month.

And, as recent tranches in which applications exceeded issuance size showed, investors don't get to place as much as they would like, even if they are well within their limits of S$200,000 per person across all tranches.

Upon application, the funds would be deducted from one's bank account or earmarked in one's Supplementary Retirement Scheme account - without accruing any interest in the meantime. Any unsuccessful application funds would be refunded after the allotment exercise at the end of the month is completed, constituting an opportunity cost.

One therefore might want to be tactical in the application amount, using the cut-off level of recent issues as a guide, especially since the Monetary Authority of Singapore (MAS) in 2018 stopped announcing the estimated amount it is issuing for the year. That practice would have given investors a guide to pace their placement sums.

Applicants also need to have an individual Central Depository (CDP) securities account to hold the bonds. This might be one of the potential hurdles for investors.One needs to have a Central Depository account to buy Singapore Savings Bonds. PHOTO: BT FILE

While opening a CDP account is not difficult, a substantial proportion of the public, especially those who are less financially savvy and are seeking to park their funds in a bank deposit account, might be put off by the requirement.

But this group of savers is also the group that SSBs would be useful to. Assuming the profile of the investors and investment sizes has not changed much from what was disclosed in May 2020, the biggest group would be those above 50 years old and nearly half of the total applications for S$10,000 or below.

Ironically, it is somewhat easier for investors to participate in riskier investments such as stocks, unit trusts, exchange-traded funds and traded bonds than in SSBs. This is because many financial institutions allow retail investors to buy these instruments even without a trading or CDP account, and with a very low minimum investment amount.

Perhaps MAS could go on an education drive to promote SSBs and correct any misconceptions there may be, and also use the opportunity to help interested savers open a CDP account on the spot.

Alternatively, waive the requirement for a CDP account. After all, SSBs are neither tradable nor easily transferable. For Singaporean investors who know how to use a browser, they already can use their SingPass to check their holdings on MAS's My Savings Bonds Portal.

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Private equity tycoons are not patient people. They are often happy to pay more for convenience. When leveraged buyout firms assemble an acquisition or investment they request that their limited partners wire the required portion of capital pledged. That process can be time-consuming. Enter opportunistic banks.

Lenders are increasingly offering so-called capital call or subscription line financing. Here the private equity firm can borrow short-term (typically nine months or fewer) against limited partner equity commitments. The process can boost deal returns.

The financing makes life easier for private equity firms, whose trillions of dollars in dry powder led to a boom in financial engineering. Among the leaders in capital call lending is SVB Financial Group, formerly known as Silicon Valley Bank, which knows a thing or two about high-growth sectors. Of its $66bn loan book at the end of 2021, more than half was attributable to capital call lines of credit. In the past five years, SVB shares have more than doubled, well ahead of the S&P 500 and JPMorgan. SVB is forecasting that its loan portfolio will grow by 30 per cent this year, regardless of rising interest rates and a choppy economy.

With bridge financing available, the time between equity capital being called and an eventual exit shrinks. This means a deal’s equity rate of return will jump, even accounting for the interest cost of the short-term loan. Research from BlackRock shows that annualised returns rise on average by just half a percentage point. A good buyout fund will have an annualised return of greater than 20 per cent.

SVB describes capital call lending as “low credit risk” and claims that it has only suffered a single loss in three decades. That loss, however, was a gut punch. The bank took an $80mn charge after someone convinced both SVB and another institution to lend money to a fake private equity firm based on fabricated documents. The guilty party was eventually arrested and was recently sentenced to 97 months in jail. No form of lending can be totally risk-free, especially in high-growth markets.