Sub-prime may have permanently altered debt markets

The sub-prime meltdown and the resulting credit crunch mean that banks in future are likely to be far more focused on their return on capital than on relationship banking, according to JPMorgan head of financial sponsors group Karen Simon.

Simon told the Reuters Hedge Funds and Private Equity Summit in London this week that the company was set to look beyond the traditional bank role of providing senior debt in a buyout.

She said that the shift in investment focus also reflected the imperative to change the business model due to the disarray among debt investors.

“We have historically, in the last three years, largely been an agency business; we basically distribute,” Simon said. “Now the people we distribute to are no longer there.”

She said the investor base for buyout debt had changed rapidly in recent years, with an increasing number of collateralised loan obligation funds and hedge funds accounting for large chunks of buyout debt.

Simon said these investors found it difficult, if not impossible, to raise fresh money to invest or the leverage they needed to produce returns and, as a result, the make-up of the market may have changed for good.

“I am very bearish on whether or not the fund market will come back in size,” she said. “It will come back, but I don’t think it will come back in size.”