Private Equity Lending: Leveling Information Asymmetries Without the Need for Regulation

20 Wake Forest J. Bus. & Intell. Prop. L. 21

While vital to the functioning of any developed economy, debt
markets and business lending have always implicated two major
considerations: first, how to efficiently allocate capital from those who
wish to save to those who wish to pursue ventures, and second, how to
regulate these markets to prevent financial catastrophes without
crippling the market in the process. Banks have traditionally and
successfully filled the role as intermediaries between savers and
borrowers. Unfortunately, untethered freedom for such institutions led
banks to fall into disincentives and left an almost inescapable need for
regulation in its path. Regulation, however, created its own difficulties
in lending to certain parts of the market. Through this regulation, many
borrowers are not receiving the credit necessary to maximize output in
the U.S. economy. Accordingly, this Article discusses the traditional
problems afflicting lending markets, reviews traditional responses to
these concerns, and postulates that private equity firms do not fall into
the same disincentives as banks. Furthermore, this Article argues that
private equity firms have stepped seamlessly into this role, mitigating
the traditional problems arising in lending markets, while
simultaneously operating in a structure which need not be regulated
like major banks.