With the recent proliferation of the hedge fund industry, which is now approaching approximately 10,000 hedge funds, capital in the form of debt has never been more abundant.  More specifically, over the past five years the number of hedge funds has increased by a multiple of almost five.  This aggressively expanding debt platform is rapidly becoming a major force in the lending industry when it comes to financing for all types of financial transactions.  When this money is combined with the amount of private equity money raised in the last 3 years, there has never been as much "deal capital" in play for pursuing acquisitions, leverage recapitalizations and debt refinancing.

Debt financing is moving away from the regulated financial institutions, and into the unregulated hedge fund industry.  This has benefited borrowers pursuing leverage to finance their businesses because they are in a position to be very aggressive in their negotiations for loan size, terms and structure.  There has never been a better time to be a borrower of money.   As hedge funds form and take investors' capital, there is a sense of urgency to invest/deploy this debt capital in deals that can generate sufficient returns for their investors.  This aggressive money lending behavior has allowed borrowers to leverage transactions to historically high leverage levels.   The Wall Street Journal confirms this every day with the announcement of another new large deal done.

For borrowers, this may be the best of times, but they should not proceed without asking certain questions.  The questions that borrowers should be asking are:  From whom am I borrowing money?  How long have they been in the lending business?  What is their specific area of expertise?  What is their track record in working with companies that fall on hard times?

Unfortunately, the answers to these questions are not pursued with the same vigor as, "How much money can you give me?" and "What will it cost?"  In practice, selecting a debt partner is no less important than choosing a business partner.  This can be a great topic for discussion when you are sitting in front of a potential borrower.  With so much money today being lent by funds that have never been in the lending business, but have been in the trading or investment business, it is going to make for some very interesting discussions between debt partners and borrowers when borrowers encounter covenant default. 

In many cases, it has already been proven that when this new breed of lenders trade out of their debt positions, borrowers have a difficult time finding out who their lenders are, because the loan paper has changed hands so many times.  Sometimes, resolutions to simple problems cannot be reached because the borrowers cannot even get a return phone call from their new lenders.  Borrowers end up doing business with debt partners who are different than the ones they started with.  This is a fact pattern that is likely to significantly increase in the months and years to come.